Nervous Habit

Nervous habit.  Stocks fell sharply yesterday as the US sanctioned Chinese companies for human rights violations raising investor concerns that a trade deal might be far off.  Even Chairman Powell’s calming words were not enough to turn stocks around.

 

MY TWO CENTS

 

1. On again?  As if caught in some sort of loop, or like a broken record (for those of you that remember vinyl and Victrolas), the saga between the US and China changed course last minute with the US adding 28 Chinese companies to a black list for human rights violations (reported here yesterday morning).  The move sent stocks deeply in the red as investors were hopeful that high level talks later this week might make some positive headway.  Confounding the news are unconfirmed reports that the Administration continues to consider sanctions that would limit public pensions investments in Chinese companies.  Oh, add to that visa restrictions on some Chinese nationals that were announced late in the day.  Stocks did not even have a chance yesterday.  But wait… WHILE YOU SLEPT a Chinese official said that China would consider a partial deal.  Good news… again.  The official did not bring up the blacklist or even the twisted NBA debacle.  A “partial deal” can mean two things.  One: China is looking to minimize the economic drag which has impacted its economy and wants to end the trade war (good).  Two: China already has been sending signals that they were unwilling to consider a broad deal that would encompass industrial, social, and intellectual property reforms – in essence signaling that they are narrowing the scope of any deal (not good).  I would argue that either of these scenarios, if they resulted in a deal would be good right now.  A partial deal, though it would not have accomplished the full objective of the trade war, would allow the US economy some much-needed breathing room.  Chinese Vice Premier Liu will meet US officials tomorrow in the US.

 

2. Tough balance.  Fed Charimen Jerome Powell spoke yesterday at the annual meeting of The National Association of Business Economics.  His carefully crafted speech was mostly a repeat of everything we have been hearing from him and other Fed officials.  Global economy is weak due to trade, US economy is still good, jobs good, inflation low, etc.  He went on to say that the Fed was watching closely and would take action if necessary.  Nothing to see here But wait, he also mentioned the Fed’s balance sheet.  That is a relatively new development that began right around the FOMC’s last meeting.  If you recall, the Fed had to inject liquidity into the short term lending markets in order to keep rates within their target range.  Overnight rates spiked up as high as 10% as banks found themselves low on funds due to tax payments and bond settlements.  The Fed’s job is to maintain that liquidity so they conducted repos to bring rates back down.  What was not normal was that the Fed had not done repos since the financial crisis.  I wrote quite a bit about it last month, but I want to reiterate that it really IS normal.  In fact so did Chairman Powell.  In his speech he said that the Fed would begin to increase its balance sheet, which means that they will be buying more securities in the open market. BUT, and this is the big thing, he warned that the move was in no way quantitative easing.  Markets initially reacted positively but then resumed their slide as it became clear that he gave no new information.  This afternoon, we will get to look at the minutes from last month’s FOMC meeting in which the Fed lowered rates by -25 basis points.  Recall that not all governors are anticipating further rate cuts this year, so we can expect that the minutes may not be as dovish as everyone would like.  Despite the minutes, there have been some weak economic  numbers since the last meeting which will certainly affect decision making later this month in the Fed’s next policy meeting.  According to Fed Funds futures, there is now a 83.9% chance of a -25 basis point rate cut later this month.

 

THE MARKETS

 

Stocks took a beating yesterday as trade fears gripped traders.  The S&P500 fell by -1.56%, the Dow Jones Industrial Average dropped by -1.19%, the Russell 2000 traded off by -1.68%, and the NASDAQ Composite Index sold off by -1.67%.  Bonds advanced and 10-year treasury yields fell by -3 basis points to 1.52%.

 

WHAT’S NXT

 

–  The Bureau of Labor Statistics will release its JOLTS Job Openings which is expected to show 7.25 million vacancies compares to last month’s 7.217 openings.This number is not a highly watched one but the number has been slipping in recent months, so any big moves may catch the attention of traders.

–  FOMC meeting minutes will be released this afternoon at 2:00 PM EST.

–  Chairman Powell will speak again today in Kansas City.

– The Treasury will sell $24 billion 10-year notes.

daily chartbook 2019-10-09