Summer is here… on Wall Street. Stocks slumped on Friday as disappointed bulls received clarification from the NY Fed, that its President was not signaling a 50 basis point rate cut. Traders were too quick to react to a speech by a Fed official and were let down when the Fed felt the need to illuminate.
MY TWO CENTS
- Sentimental consumers. Consumer sentiment can vary wildly, especially during times of uncertainty over the economy, politics, and geopolitical strife. With that uncertainty being a fact of life in 2019, a good way of gauging sentiment is through timely economic releases. University of Michigan Sentiment is one of those such indicators. Michigan releases preliminary reads on sentiment throughout the month and ultimately publishes a sentiment indicator at the end of the month, giving investors a real time view into survey respondents’ sentiments on Current Conditions as well as Expectations for the next six months. Last Friday, the preliminary read for July came in at 98.4 which is an increase from last month’s 98.2. Though it was slightly lower than expectations, it is still positive considering the uncertainty that is swirling around ahead of next week’s Fed meeting, trade strife, and troubles in the Gulf. The survey showed a decline in current conditions from 111.9 to 111.1, while expectations for the next six months edged up from 89.3 to 90.0.
- Negative interest rates are fun for nobody, especially banks. In last week’s bank earnings, one thing stood out as a common theme: pressure on net interest margin. Banks primarily earn income by borrowing cheaply and lending the same money at higher rates, in the classic and most basic sense. Net interest margin is a key metric that is applied to a bank’s health and many of those that reported last week either missed the mark or warned of pressure. This is not surprising given that interest rates are so low in the US. Even more importantly, the yield curve (that thing that I appear to be obsessed with) is so flat. Banks borrow money in vehicles like CD’s which are tied to short term treasury yields and Fed Funds. Banks loan money out in instruments like 30-year fixed mortgages, which are tied to longer term yields like the 10-year treasury note. In case you haven’t been following my notes too closely, the spread between 3-month T-bills and 10-year treasury notes is -3 basis points. In other words it costs more to borrow short term than can be made by lending long term, making it difficult for banks to make money. The situation is much more complex in the Eurozone with many of the larger industrial economies sporting negative interest rates. European banks will have to make up for the declines in other areas like trading… and ATM fees.
THE MARKETS
Traders were disappointed on Friday after the New York Fed issued a clarification that the boss’ statements being interpreted as a -50 basis point cut were incorrect, as reported in my note on Friday morning. Later in the session, news of a British vessel being seized by Iran added further tension to the markets resulting in a down day for equities. The S&P 500 fell by -0.62%, the Dow Jones Industrial Average slipped by -0.25%, the Russell 2000 dropped by -0.5%, and the NASDAQ 100 traded down by -0.88%. Bonds were off a bit and 10-year treasury yields inched up by +3 basis points at 2.05%. Crude oil added +0.6% on tension in the Gulf after slipping all week.
WHAT’S NXT
– This morning we will get the Chicago Fed’s National Activity Index, which is expected to have rebounded from last month’s -0.05 to +0.08.
– The week ahead will bring Existing Home Sales, Manufacturing PMI, New Home Sales, Durable Goods Orders, and Advance GDP.
– There will be lots of earnings in the week ahead with over 130 S&P 500 companies reporting earnings, amongst many others. Please refer to the attached economic and earnings calendars for details.
– This morning we will hear from Revolve Group, PetMed, and Cadence. Halliburton announced earlier with a +17.1% surprise and after the bell we will hear from Whirlpool and TD Ameritrade.
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