Hot to trot. Markets climbed on continued optimism that the Fed is looking out for them. Even the threat of conflict with Iran in the wake of a downed US drone couldn’t hold risk-on sentiment back.
MY TWO CENTS
- What are we missing? In Wednesday’s Fed policy announcement, the Fed took out the word “patience” indicating that they were ready to act if the economy worsened. Chairman Powell echoed that sentiment in his press conference and the dot plots showed that 8 Fed governors expect rates to be lower by year-end. So the Fed is watching and ready to act which offers traders some cold comfort. The fact remains however, that there are an increasing number of economic indicators that are flashing some warning signs. Earlier this week the Empire Manufacturing indicator logged its worst monthly decrease on record showing that manufacturing contracted in the region. Yesterday, a similar indicator showed a 16 point pullback for the Philadelphia Fed region. The Conference Board released its Leading Index yesterday and the numbers logged zero growth for the month and revised last month’s growth down to 0.1% from 0.2%. The Leading Index is perhaps one of the most closely watched economic predictor. The economy is clearly slowing down and the Fed is willing to lower rates to ease the blow, but in all cases things get worse for companies before they get better, even with Fed stimulus. The S&P 500 closed at an all time high yesterday.
- All the action is happening in the back of the chartbook. The news of the Fed and trade wars have been commanding much of the headlines in the past few weeks but other things are happening. In my attached daily chartbook, the back part of the book is dominated by commodities and bonds which have been very active lately. Namely, and not surprising given the rising tensions with Iran, Crude Oil has risen by over $5 in the prior week after double bouncing on an important support level around $50. The latest bounce is the result of the rising tensions between the US and Iran in the wake of Iran’s suspected involvement in sabotaging two tankers and a downed US drone. WHILE YOU SLEPT, the New York Times reported that The President approved airstrikes in Iran but abruptly cancelled the strikes last minute. Crude rose further on the news. Gold has been on a tare as the chance for Fed rate cuts have gone up. Lower rates mean increased inflation which impact the price of Gold. Yesterday, Gold closed at its highest level since September of 2013. The Dollar Index continued its slide in response to the Fed’s dovish language and 10 year treasury yields traded below 2% intraday yesterday. Things are happening… and not just in the world of stocks.
Stocks offered thanks to the Fed yesterday, closing firmly in the green despite some alarming economic numbers and increased tensions in the Gulf. The S&P500 climbed by +0.95%, the Dow Jones Industrial Average traded up by +0.94%, the Russell 2000 advanced by +0.51%, and the NASDAQ 100 ascended by +0.92%. Bonds moved up and 10-year yields ended the session at 2.02% after trading below 2% intraday. As of today, the 3-month / 10-year yield curve has been inverted for a month increasing its chances of predicting a recession.
– Markit Manufacturing PMI is expected to come in unchanged at 50.0 while the Services PMI is expected to come in at 51.0. Numbers above 50 indicate growth.
– Existing Home Sales is expected to show a month over month growth of +2.1% compared to last month’s -0.4% decline.
– Cleveland Fed President Loretta Mester, Fed Governor Lael Brainard, and San Francisco Fed President Mary Daly will speak today.
– The Federal reserve will release its stress test of large financial institutions after the close.
– Next week’s numbers will feature more regional fed indices, more housing numbers, consumer confidence, GDP figures, durable goods orders, and the PCE deflator.