You can’t always get what you want

You can’t always get what you want…. Stocks were routed by comments made by Chairman Powell just minutes after the Fed lowered the key interest rate.  Traders sold off on fears that there may be no more rate cuts in the future.

 

MY TWO CENTS:

 

  1. Just a little off the top.  Yesterday’s rate cut essentially gave the markets what they were craving for: a rate cut for insurance.  What does that mean exactly?  Well, clearly there are portions of the economy that are not showing signs of distress such as employment, consumer spending, and consumer confidence.  All of these indicate a relatively strong economy.  So why the rate cut then?  There are parts of the economy that are not doing so well such as manufacturing, business investment, and housing.  All of those will certainly benefit from lower borrowing costs.  The Chairman’s reasoning for the cut?  Weakening domestic economy, muted inflation, and global headwinds caused by decaying global economies and trade problems.  OK, nothing new there.  So why then did the market sell off?  Two primary reasons: first – disappointment that the Fed did not provide even more stimulus, and second – the Chairman’s botched press release in which he overemphasized the fact that this cut is just a “mid-cycle adjustment” and not necessarily the beginning of a long rate cutting regime.  Comments like that are not taken well by a market that is fully addicted to easy monetary policy, as evidenced by the temper tantrum that ensued.  What’s next then?  Well, naturally that is up to the data, which will be carefully monitored by the Fed and will dictate if rates need to be curtailed further in the future, according to the Chairman.  According to futures the probability of a rate cut at the Fed’s September meeting is now at even odds, down from around 70% going into yesterday’s press conference.  We’ll just have to wait and see.2. On quantitative easing. Yesterday, the spotlight was on the Fed’s rate cut and not so much on the fact that the Chairman announced that the fed would end its balance sheet drawdown immediately, one month earlier than planned.  That means that the quantitative tightening achieved by selling off bonds held by the fed will end.  Remember supply and demand?  The Fed has been selling its bonds systematically adding to supply and pressuring bond prices, though it may not be obvious as bonds have remained expensive with perpetually low yields.  Now the Fed will discontinue the sales which should have the effect of less upward pressure on yields… in theory.  Bonds under less pressure can go up more easily moving yields down further.  Good news for corporations who rely on the bond market for finance and home buyers who use mortgages.  Not so good for banks who lend out money and investors who rely on fixed income yield for retirement.

 

THE MARKETS

 

Stocks sold off when investors learned that the long awaited rate cut might be one and done.  Investors were hoping to get a deeper cut or at least a hint of future rate cuts and they got neither, prompting a volatile selloff of risk assets.  The S&P500 fell by -1.09%, the Dow Jones Industrial Average sunk by -1.23%, the Russell 2000 slipped by  -0.69%, and the NASDAQ 100 sunk by -1.30%.  Bonds climbed pushing 10-year treasury yields down by -4 basis points to 2.01%.  The yield curve undulated as short term as well as long term rates dropped leaving the 3-month/10-year spread still inverted at -5 basis points.  The dollar index, which should fall on a rate cut rose by +0.48% reflecting investor disappointment.  Lower rates usually lead weaker currency as investors seek out higher yields in other countries.

 

WHAT’S NXT

 

– Markit and ISM Manufacturing PMI’s are expected to be 50.0 and 52.0 respectively compared to last month’s 50.0 and 51.7.

– Construction Spending is expected to have grown by +0.3% compared to last month’s contraction of -0.8%.

– Before the bell we will hear from Clorox, Abiomed, Dunkin’ Brands, Verizon, Yum! Brands, Archer-Daniels-Midland, General Motors, and Qorvo, amongst others.  After the bell earnings include Square, Davita, First Solar, Pinterest, US Steel, and Etsy.

daily chartbook 2019-08-01

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