Tom Essaye quoted in MarketWatch on May 2nd 2019. After Powell’s news conference, investors were “left with a market lacking a material, positive catalyst at the moment and one at the top of reasonable valuations…” said Tom. Click here to read the full article.
What’s in Today’s Report:
S&P futures are indicating stocks will open at all-time highs today thanks to strong earnings and Fed optimism after President Trump mentioned rate cuts and QE yesterday.
AAPL beat on earnings and revenue in Q1 but also notably revised guidance solidly higher citing improvement in Chinese markets. The company’s shares are trading up roughly 6% in the pre-market.
Most overseas markets are closed for holidays today and the market’s main focus will be the Fed events this afternoon: FOMC Meeting Announcement (2:00 p.m. ET), Fed Chair Press Conference (2:30 p.m. ET).
There are a however a few important economic reports that could move markets this morning: ADP Employment Report (E: 180K), ISM Manufacturing Index (E: 55.0), and Construction Spending (E: 0.2%).
Bottom line, the market is looking for more dovish rhetoric out of the Fed today and if Powell delivers, another set of closing highs in U.S. stock indexes is likely.
What’s in Today’s Report:
Stock futures are little changed this morning and international markets were mixed overnight amid quiet newswires as yesterday’s Fed decision was digested against a slew of bad corporate commentary so far this week.
Economically, U.K. Retail Sales were 0.4% vs. (E) -0.3% last month, helping the FTSE outperform ahead of the BOE Announcement due later this morning.
Today, the calendar is slightly busy in the morning with several economic reports scheduled to be released: Jobless Claims (E: 225K), Philadelphia Fed Business Outlook Survey (E: 4.4), and Leading Indicators (E: 0.1%), while no Fed officials are scheduled to speak.
That will leave the market primarily in digestion mode in the wake of the Fed and for stocks to meaningfully rally from here, we will need to see the yield curve steepen and the dollar continue to decline, otherwise, the S&P will have trouble breaking back above 2850.
What Is The Value Of The FOMC Minutes? Tom Essaye Quoted in Benzinga to share his view on the recent Fed meeting and it’s effect on markets. “This Fed meeting is critically important for markets because…” Click here to read the full article.
What’s in Today’s Report:
Stock futures, the dollar, and Treasuries are all little changed this morning while international markets were mixed overnight as investors focus on the Fed today.
There were no market moving economic reports o/n although rising trade tensions between the U.S. and China and several bad earnings reports citing slowing global trade (especially FDX) have become a growing headwind for risk assets since yesterday’s close.
With focus on the Fed this afternoon, it is likely to be a quiet morning with price action dictated by positioning into the announcement. The one release that could move markets this morning is the Weekly EIA Inventory Report which will print at 10:30 a.m. ET (E: +800K bbls).
Turning to the Fed, the FOMC Meeting Announcement and Forecasts will hit at 2:00 p.m. ET and then Fed Chair Powell’s Press Conference is scheduled for 2:30 p.m. ET.
To recap, the two key developments to look for from the Fed are balance sheet reductions and fewer rate hikes in 2019 (the dot plot). The market’s expectations of a very dovish Fed are extremely high right now, so there is not much room for error by the FOMC today and any sort of disappointment could spark a wave of volatility across asset classes.
What’s in Today’s Report:
U.S. futures are higher this morning as trader focus turns to the Fed meeting while good economic data in Europe helped drive gains in international markets overnight.
U.K. unemployment fell to a multi-decade low of 3.9% in February according to the latest Labour Market report while the Business Expectations component of the German ZEW Survey was –3.6 vs. (E) -11.0 underscoring a less pessimistic outlook on the economy by analysts.
A sense of “Fed paralysis” has already begun to fall over markets this week as the FOMC meeting begins today and trader focus has largely shifted to tomorrow’s announcement and press conference.
As far as catalysts go today, there is one economic report: Factory Orders (E: 0.1%) but the single data point’s influence on the market is likely to be limited with the Fed looming tomorrow.
What’s in Today’s Report:
Futures are slightly higher as markets digest yesterday’s very dovish Fed statement and subsequent rally, while Chinese economic data beat expectations but still was weak in the absolute.
Chinese January Manufacturing PMI beat estimates at 49.5 vs. (E) 49.3, but it still signals outright contraction, so this doesn’t imply stabilization in that economy.
Other economic data from Europe, including Euro Zone GDP and German Unemployment, met expectations.
Today there are two economic reports, Jobless Claims (E: 220K) and the Employment Cost Index (E: 0.8%) but neither should materially move markets.
So, focus will move back to earnings (there are a lot of reports today and GE has started us on the right foot) and any headlines from the U.S./China trade talks. Regarding U.S./China trade, we don’t expect a deal from this meeting, but more reports of progress will support (and likely extend) yesterday’s rally.
What’s in Today’s Report:
Futures are drifting modestly higher this morning as investors focus on the Fed, U.S.-China trade talks, and earnings.
News flows were slow overnight although the well-received AAPL earnings from late yesterday are helping US futures rally.
Today, primary focus will be on the Fed with the FOMC Meeting Announcement at 2:00 p.m. ET followed by Chair Powell’s press conference at 2:30 p.m. ET.
There are two economic reports due out this morning: ADP Employment Report (E: 174K) and Pending Home Sales (E: 0.3%). The former will be closely watched but it is unlikely we see any sort of material move in markets ahead of the Fed.
Earnings season is reaching its peak so there are a slew of reports to watch today with: BABA ($1.65), BA ($4.52), T ($0.85) before the open and FB ($2.17), MSFT ($1.09), TSLA ($2.15), V ($1.25), and QCOM ($1.09) all due to report after the close.
Again, earnings and data will be followed today and ultimately will be digested by the market accordingly, but the Fed this afternoon will be the major focus and whether or not the outcome of the meeting is as dovish as recent Fed commentary has been will decide whether the S&P breaks higher towards 2700 or retests initial, key support at 2600.
Futures are slightly higher following a generally uneventful night as markets digested the Fed decision. Importantly, there was no major follow through to Wednesday’s late sell off.
Economic data didn’t contain any surprises as German Gfk Consumer Climate beat estimates (10.6 vs. (E) 10.4).
Today there are multiple economic reports including Durable Goods Orders (E: 2.2%), Final Q2 GDP (E: 4.3%), Jobless Claims (E: 216K) and Pending Home Sales (E: 0.0%) as well as two Fed speakers, Kaplan (2:00 p.m. ET), Powell (4:30 p.m. ET). But, Powell just spoke at length yesterday so he shouldn’t say anything too surprising. Meanwhile, unless we get a very disappointing Durable Goods report, the economic data shouldn’t move markets.
Instead, the Italian budget will be the most important event today, and if the budget deficit prints above 2.5%, that likely will weigh on the euro and boost the dollar, which could be a headwind for stocks.
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The Fed meeting is more important than any other this year, for the simple reason that it could either exacerbate the glaring discrepancy between stocks and bond yields (which would be negative for risk assets medium term), or it could help close the gap (which would be positive for risk assets).
Specifically, the bond market has quietly been pricing in the expectation of a “dovish hike” for this meeting via the decline in yields. That “Dovish Hike” means the Fed does hike rates 25 basis points, but makes the statement dovish enough that it doesn’t cause longer-dated yields (i.e. 10- and 30-year Treasuries) to rise. If the Fed executes on that expectation, then we will see the 10-year yield dip and likely test the 2017 lows of 2.14%, and again that is a problem for stocks over the medium/ longer term.
Looking at the actual meeting itself, whether it meets expectations, is dovish, or is hawkish, will depend not only on the rate hike, but also the inflation commentary and any guidance regarding “normalization” of the balance sheet.
What’s Expected: A Dovish Hike. Probability (this is just my best guess) About 70%. Rates: It would be a pretty big shock if the Fed didn’t hike rates tomorrow, so a 25-basis-point hike to 1.25% is universally expected. Statement: In paragraph one, the Fed should include some additional soft language regarding inflation, noting that it’s been soft for a few months. However (and this is important), the Fed should still attribute sluggish inflation to “transitory factors,” implying Fed members are still confident they will hit their 2% inflation goal. Dots: No change to the 2017 dots (so, still showing three hikes as the median expectation). Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.
Dovish If: No Hike or a Very Dovish Hike. Probability (again, my best guess) About 10%. Rates: It’s widely expected that Fed will hike rates, but there’s always a possibility of a surprise. More likely, the Fed will hike 25 bps and accompany it with a very dovish statement. Statement: The Fed changes the characterization of risks from “balanced” to “tilted to the downside,” or some similar commentary, thereby signaling rate hikes are off the table again. This is a very unlikely, but possible change. More likely is the Fed adding considerable language regarding concerns about lower inflation. Dots: A reduction of the dots to reflect just two rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.
Hawkish If: We get a regular hike, not a “Dovish” Hike. Probability About 20%. Rates: The Fed Hikes Rates 25 basis points. Statement: The Fed does not add softer language regarding growth or inflation in the first paragraph, and instead just largely reprints the May statement, which was dismissive of the recent dip in inflation and growth. Dots: The dots remain the same or even increase one rate hike in 2017 (this is unlikely, but possible). Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.
Wild Card to Watch: The Fed Balance Sheet
The market fully expects the Fed to elaborate on when and how it intends to reduce its balance sheet (i.e. the holdings of Treasuries it has purchased over the years through the QE program).
I covered why the balance sheet is important back in April (a link to that report is here) but the bottom line is that when and how the Fed begins to reduce its balance sheet (the term “normalize” is just Fed speak for “reduce Treasury holdings”) could be a substantially hawkish influence on the bond market, regardless of rate hikes.
Specifically for tomorrow, the key detail the market will be looking for is at what level of interest rates does the Fed begin to reduce its Treasury holdings. The number to watch here is 1.5%. It’s widely expected that at 1.5% Fed funds, the Fed will begin to reduce its balance sheet. If we get one more rate hike this year, then that puts balance sheet reduction starting in early 2018 (likely March).
For a simple reference, if the Fed statement or Yellen at her press conference reveals the Fed will reduce holdings before 1.5%, that will be hawkish. If it’s revealed that the Fed will reduce holdings after rates hike 1.5% that will be dovish.
Bottom Line
This Fed meeting is likely the most important of the year (so far), not just because we will get updated guidance on expected rate hikes and the balance sheet, but also because it comes at a time when we are at a tipping point for bond yields (if they go much lower and the yield curve flattens, more people will start talking recession risk). We also are potentially seeing a shift in stock sector leadership (from defensives/income to cyclicals/ banks), so understanding what the Fed decision means for rates will be critically important going forward. You’ll have our full analysis, along with practical takeaways, first thing Thursday morning.
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