So Much for Small Talk

So much for small talk.  Stocks rallied yesterday as Fed Chief Jerome Powell gave the nod on rate cuts.  Powell’s testimony on Capital Hill hinted strongly that a rate cut is coming.

 

MY TWO CENTS

 

1.  The rate whisperer is whispering… and stocks are listening.  In his testimony before the House Banking Committee yesterday, Chairman Powell didn’t mince his words in strongly suggesting a rate cut.  In his prepared statement, Powell articulated that economic indicators from around the world “… have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy.”  He further pointed out that trade uncertainty has slowed investment and economic growth.  When asked directly if the strong jobs report from last Friday would affect the rate decision, the Chairman replied with a direct “no”.  He pointed out that employment, though positive, is only one very small factor in the decision model.  Finally, Powell pointed to low inflation, which if added to his other two themes of economic weakness and trade uncertainty, point to a high likelihood for a rate cut later this month.  Stocks and bonds traded up and the dollar weakened.  According to Fed Funds Futures the probability for a 25 basis point rate cut now stands at 69.3% and a 50 basis point cut has 30.7% probability.  If you recall, in yesterday’s note I relayed that futures indicated no chance of a 50 basis point cut and even a slight (4.4%) chance that rates would be left unchanged.  A few words can make a real impact… if spoken by the right person.

 

2.  Let’s not get too excited… earnings still pay the bills.  As all eyes remain on the Fed and their next move, earnings season quietly, but rapidly approaches and expectations are being ratcheted down.  Based on guidance leading up to announcements in which a large majority are negative, analysts are lowering their estimates for the second quarter.  As a result, overall earnings are expected to be flat or slightly negative.  To be clear, a similar expectation existed going into last earnings season which ultimately turned out better than expected.  However a risk still remains if earnings do display negative growth.  Stock values remain on the high side based on multiples, so if the ‘E’ in P/E goes down, stocks look even richer.  Still, with yields on bonds so low and creeping lower with potential rate cuts, stocks should continue to get some support from investors seeking returns.  Investors need to remain extra vigilant through earnings season because lower rates can only take stocks far.

 

THE MARKETS

 

Markets rallied yesterday in response to the Fed Chairman’s veiled green light on rate cuts.  The S&P 500 briefly traded above the 3000 milestone, ultimately closing below, but still in the green by +0.45%.  The Dow Jones Industrial Average traded up by +0.29%, the Russell 2000 climbed by +0.16%, and the NASDAQ 100 advanced by +0.98%.  Bonds traded up slightly and 10-year treasury yields ended the day flat at 2.06%.  Increased chances of a rate cut weakened the US Dollar and the Dollar Index pulled back by -0.39%.  Gold advanced by +1.53% in response to lower rate expectations and crude oil closed up by +4.5% at 60.43 in response to the storm in the Gulf.

 

WHAT’S NXT

 

–  The Bureau of Labor Statistics will release inflation numbers this morning.  Year over year CPI is expected to have fallen to 1.6% from 1.8% while the core CPI is expected to remain unchanged at 2%.

–  Today will be a crazy Fed-speak day with the highlight being Powell’s second day of testimony to the Senate Banking Committee starting at 10:00 AM.  Later and throughout the session we will hear from Fed members Williams, Bostic, Barkin, Quarles, and Kashkari.

– The treasury will auction $16 billion 30-year bonds.

–  Delta Airlines and Fastenal released earnings this morning with a beat of +2.7% and a miss of -4.5% respectively.

daily chartbook 2019-07-11