The Cavalry Approaches

The cavalry approaches.  Scary economic data was not going to push markets down yesterday because the Fed will come to the rescue… so goes the theory.  Stocks fell on bad economic data but recovered and closed in the black on high hopes of more rate cuts.




  1.  Broken logic.  2019 has been a year of the Fed.  A trade war between the US and China is raging with ever increasing victims while the EU and Chinese economies are faltering.  They are not alone as the US economy has been showing signs of weakness for much of the year.  Corporate earnings continue to grow but at a much slower pace than in prior years.  How then is it that stocks are up?  There is only one driver:  The Federal Reserve.  The Fed has been assuring the markets in both words and action for the entire year.  Rates have been cut, kind words have been spoken, and money has been silently added to the overnight liquidity market.  All of these things are supposed to ensure that the economy will continue to grow.  Lower rates, more money, and a healthy stock market should ensure that companies keep investing and consumers keep buying.  Stocks then, should benefit from the now-bolstered economy.  When the Fed becomes the sole reason for positive market moves, a sort of twisted logic begins to emerge.  Yesterday’s market action was governed by that logic.  The first two days of the quarter have been marked by selloffs in equities in response to some underwhelming data from the manufacturing sector and a weak job creation number from ADP.  Yesterday morning, we got some more bad data which, initially and rightly so, spooked the market sending it down.  Wait for it… wait for it… Suddenly, the market reversed and closed well into the black.  Why?  The Fed put.  Such a bad set of numbers would surely cause the Fed to lower rates further at their meeting later this month… according to yesterday’s trade.  According to Fed Funds futures there is now an 87.1% chance of a -25 basis point rate cut at the next Fed meeting, up from a week ago which handicapped the probability at 49.2%.  We are back to “bad is good”.


  1.  Service, please.  Manufacturing has had a difficult year so far.  A trade war between the US and China could only hurt the sector which relies so heavily on foreign manufactured parts and raw materials.  Tariffs and broken supply chains are confounded by slowing sales from diminishing customer orders as purchasing mangers tap on the brakes.  Even though the US is a net importer, many US firms still rely on foreign customers, so slowing economies in the EU and China can have a real effect on US producers, and it has.  On Monday the Institute for Supply Chain Management released its Manufacturing PMI, which came in at 47.1 missing estimates.  Numbers below 50 represent contraction and this last read was the second month in a row below 50.  Furthermore the gauge had not been that low since 2009.  It should not have been a surprise as the numbers have been getting worse throughout the year.  Many strategists waved off the increasingly bad figures by stating that manufacturing only represents 12.5% of GDP.  The US is a service-driven economy.  Services represent roughly 80% of the US GDP.  ISM also releases a Non-manufacuring PMI, which polls 300 service company managers.  Yesterday, that number came in at 52.6, down from last month’s 56.4.  Still above 50, but it is the lowest level for the index in 3 years.  Some reasons given for the slowdown: a tight labor market and trade war related tariffs.




Stocks rallied yesterday as bad economic data awoke the bad-is-good trade with traders hoping for more Fed rate cuts.  The S&P500 climbed by +0.80%, the Dow Jones Industrial Average rose by +0.47%, the Russell 2000 traded up by +0.45%, and the NASDAQ Composite Index advanced by +1.12%.  Bonds also rose and 10-year treasury yields fell by -6 basis points to 1.53%.  Crude oil rose moderately yesterday giving the energy sector a much-needed positive day of trade.




– The Bureau of Labor Statistics will release the monthly employment situation.  Non-Farm Payrolls is expected to show +145k new payrolls compared to +130k last month.  There are whispers that the number could come in even lower.  The Unemployment Rate is expected to come in at 3.7%, same as last month.

– Boston Fed President Eric Rosengren, Atlanta Fed’s Raphael Bostic, and Fed Chairman Jerome Powell will all speak today.

– Next week’s releases include PPI, CPI, JOLTS job openings, and University Of Michigan Sentiment.  The Fed will release its minutes from the last FOMC meeting as well.


Have a great weekend!

daily chartbook 2019-10-04

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