Fever Broke?

Fever broke?  Stocks roared back yesterday displaying immunity to the continued spread of the Coronavirus.  Economic numbers show that consumers are confident and durable goods purchases were strong owing to military spending.

N O T E W O R T H Y

Poker face.  It’s Fed day!  The Federal Open Market Committee will announce its policy decision this afternoon and follow it up with a press briefing with the Fed Chairman.  According to Fed Funds Futures, there is a 10.5% chance that the Fed will raise interest rates today.  You read that correctly: raise.  “Why would they do that?”, you might ask.  Well, the economy continues to plod on, the trade war between the US and China has calmed down, unemployment is still at 50 year lows, and stock markets are healthy (even though that it is not part of their mandate).  So in order to prevent the economy from overheating, the Fed would seek to pump the brakes by raising rates a bit… theoretically.  But we are in different times.  This is the era of easy money in which central banks are obsessed with calming and pumping up market expectations.  Isn’t there a danger in that?  At least one Fed governor thinks that the economy can and should run hot.  We all know what the President feels about that. Speaking of the President, he will be able to add two new Fed governors to fill emptying seats. Wanna guess which way his picks lean?  Of course, they are notable doves, which means they favor easy monetary policy.  Back to what we can expect today. Despite the recent spike in the probability of a rate hike, the Fed has made it pretty clear that they are on hold for now, both in words and projections.  You may remember the last released dot plot which showed that Fed Governors are projecting rates to remain unchanged for 2020. Assuming that the Fed keeps rates the same, there are a number of other things investors will focus on today.  Even though markets seem to have put fears of the Coronavirus behind them, there can, and most likely will be some impacts on the global economy.  The virus does continue to spread with confirmed cases and reported deaths increasing.  Traders have discounted stocks of companies that have retail or supply chain exposure to China.  But what about the impact on China itself? Factories are being closed, retail locations are empty, and travel is all but shut down.  One doesn’t need to have a degree in economics to recognize that there will be an impact on Chinese GDP. How much of an impact will depend on how long it takes to contain the virus.  So back to the Fed.  Remember all of last year when Chairman Powell spoke of “global headwinds” and “cross currents”  which warranted easier policy?  That was Fed code speak for slowing economic growth in Asia, specifically China as a result of the, now long forgotten by the market, trade war.  The Chinese economy has been on its heels even slowing prior to its row with the US and the trade war along with a decimation of its hog population has weakened growth further.  Already on its heels, a prolonged lockdown of the country can have some negative effects on growth.  More “headwinds” to contend with.  The Fed has a long history of manipulating investor perceptions as a policy tool and the Powell Fed is particularly adept at it.  Traders will be looking to see what the Chairman says relative to the virus outbreak.  Additionally, the Fed’s recent re-introduction of open market operations.  Traders have been referring to that as the non-QE QE because the Fed insists that their injection of liquidity into the market is not QE… even though it is.  Traders who expect the Fed to continue to inject liquidity through the REPO market have been and will continue to speculate on further stimulus.  If that is not Quantitative Easing, what is? Expect some discussion around the Fed’s growing balance sheet, which is directly related to the non-QE QE.  In this election year with the market running hot, the Chairman will have to tread lightly and select his words carefully so as not to spook investors. Remember the taper tantrum?  A quick refresher:  Back in 2013, then Chairman Ben Bernanke announced that the Fed was considering tapering its QE program and treasury rates spiked causing volatility.  Wanting to avoid a repeat of that, Powell is not likely to rock the boat with any broad swinging measures.  If we look forward at Fed Funds Futures we see that by September of this year the probability of a rate cut goes to 58%.  You read that right, cut.

THE MARKETS

Yesterday, stocks rallied in their largest positive move since October.  Solid economic numbers combined with easing fears of the Coronavirus gave the bears the day off.  The S&P 500 rose by +1.01%, the Dow Jones Industrial Average climbed by +0.66%, the Russell 2000 advanced by +0.86%, and the NASDAQ Composite Index jumped by +1.43%.  Bonds pulled back and 10-year treasury yields climbed by +5 basis points to 1.65%.

NXT UP

– Pending Home Sales are expected to have grown by +0.5% compared to last month’s +1.2% growth.

– The FOMC will announce its policy results at 2:00 PM EST.  Rates are expected to remain unchanged but traders will focus on the Chairman’s press conference that follows the announcement.

– This morning Anthem, Dow Corp, Corning, AT&T, McDonalds, and General Dynamics were amongst those that beat while Stanley Black & Decker, Boeing, and Hess missed estimates. MasterCard will announce before the bell and after the close we will hear from Facebook, Microsoft, Tesla, Qorvo, Lam Research, and Archer Daniels Midland.

daily chartbook 2020-01-29