FOMC Takeaways (Not Good)

What’s in Today’s Report:

  • FOMC Decision Takeaways – Not Good.

Futures are slightly higher as markets bounce following Wednesday’s post Fed selloff.

It was a quiet night of news as there were no new headlines on trade, and most commentary focused on the takeaways of the Fed decision.

Economically, UK data was mixed as Nov. Retail Sales were strong (1.4% vs. (E) 0.3%) while Dec. Distributive Trades were weak (-13 vs. (E) 15).

Today focus will remain on the economic data, which becomes even more important in the face of the not dovish enough Fed.  We get to notable reports today, Jobless Claims (E: 220K) and Philadelphia Fed Business Outlook Survey (E: 16.5) and if the later misses expectations, look for more selling.

FOMC Preview

What’s in Today’s Report:

  • FOMC Preview

US stock futures are enjoying a pre-Fed bounce this morning due to positioning and short-covering as stocks remain oversold after the steep losses Friday and Monday.

Despite the bounce in futures, news flows were actually bearish since yesterday’s close as both FDX and MU made cautious comments about slowing global growth in their respective earnings calls and both cut guidance for 2019.

In the US today, there is one economic report due to be released: Existing Home Sales (E: 5.190M) and a “beat” would be well received after the string of soft housing data points of recent, but frankly all eyes will be on the Fed and the report will not materially move markets.

The New York session is likely to be slow in the morning with traders positioning into 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.

Fed Wildcard to Watch

What’s in Today’s Report:

  • The FOMC Wildcard to Watch: Powell’s Presser
  • The Oil Rally (And How Long It Can Last)

Stock futures are slightly positive this morning ahead of the Fed today while global markets were largely flat after another quiet night of news.

There were no market moving economic reports overnight.

Oil prices are slightly lower this morning after the API reported a +2.9M bbl build in crude stocks vs. (E) -1.3M bbls draw ahead of this morning’s weekly EIA release.

Today, the main market focus will be the Fed Events: FOMC Announcement and Forecasts (2:00 p.m. ET), Fed Chair Press Conference (2:30 p.m. ET) although, there is also one economic report out in the U.S. this morning: New Home Sales (E: 630K).

Barring any bombshell headlines about trade or to a lesser degree, politics, it is likely to be a quiet session with price action being driven by positioning until the Fed starts up at 2:00 p.m. ET.

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FOMC Meeting Takeaways, August 17, 2017

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The FOMC minutes resulted in a “dovish” reaction in currencies and bonds, but in reality they didn’t reveal anything new.

The two big takeaways from Wednesday’s FOMC were 1) The Fed is united in reducing the balance sheet in September (which will be the start of the removal of additional accommodation) and 2) The Fed is divided on whether to hike rates in December because of low inflation. Neither of those takeaways should be surprising to anyone who has been paying attention.

The former (that the Fed is committed to reducing its balance sheet) was reaffirmed by the minutes yesterday, and while the market seems to be ignoring this event, I do want to remind everyone that the Fed will be reducing its Treasury holdings for the first time in a decade. That will, over time, have a “tightening” effect on the economy (although admittedly not at first).

The latter was where the market generated it’s “dovish” interpretation of the Fed minutes, but in reality the fact that “some” Fed members want to not hike rates again this year shouldn’t be a surprise. Bullard, Kashkari, Mester and others have voiced caution about further rate hikes in the past few weeks due to low inflation.

Conversely, Dudley, Williams and others have stressed very low unemployment and still-loosening financial conditions as reasons to continue with gradual rate increases. Otherwise, they risk getting behind a sudden upshot in inflation that forces them to raise rates very quickly.

Point being, we know there is this divide, and it will be resolved in the coming months based on inflation data. If inflation data bottoms and heads higher, they’ll hike rates in December. If it doesn’t, they probably won’t. That’s no different than it was Wednesday at noon.

From a market standpoint, the reaction was “dovish” as the dollar and bond yields dropped, and stocks rallied modestly. But, yesterday’s FOMC minutes should not be enough to elicit a material rally in stocks, nor should it be enough to push the dollar or bond yields to recent 2017 lows.

About the only notable takeaway from the minutes is that it’s likely anecdotally bullish for the “Stagnation” portfolio…(withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

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Weekly Market Cheat Sheet, July 31, 2017

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Last Week in Review

Data has been remarkably consistent the last few weeks, including last week: “OK” but not great economic growth, and consistent signs that inflation is losing momentum. As such, the economic data continues to point to a “Stagnation” set up for stocks and other assets.

Given that inflation trends are more important than growth trends right now, I’ll start with the Quarterly Employment Cost Index, which, like many other inflation indicators in Q2, slightly missed estimates. The Q2 ECI rose 0.5% vs. (E) 0.6, maintaining a 2.4% yoy increase from Q1, but slightly disappointing vs. expectations.

Additionally on Friday, the PCE Price Indices from the Q2 GDP report showed deceleration in the pace of inflation. The PCE Price Index rose just 1% in Q2 vs. (E) 1.2%. Now, none of these inflation statistics are particularly bad. Yet from a policy standpoint, these numbers won’t make the Fed eager to tighten policy ahead of the current schedule (balance sheet reduction in September, rate hike, probably, in December).

Turning to actual growth data, it was “ok” but not great. Q2 GDP met expectations with a 2.6% yoy gain, and that was a true number as Final Sales of Domestic Product (which is GDP less inventories) was also 2.6%. Consumer Spending, or PCE as it’s known in the GDP report, rose 2.8%, again a solid but unspectacular number.

Similarly, June Durable Goods, while a decent report, wasn’t that strong. The headline was a big beat at 6.5% vs. (E) 3.5%, but that was because of one-time airline orders. New Orders for Non-Defense Capital Goods ex-aircraft, the best proxy for corporate spending and investment, was revised higher in May but dipped 0.1% in June.

Point being, like most growth data recently, it wasn’t a bad report, but it’s not the kind of strength that will spur a reflationary rally.

Finally, the one economic data point that was strong last week was the July flash manufacturing PMI. It rose to 54.2 vs. (E) 53.2, but while that is a potential positive (it’s a July report so it’s the most current) the PMIs are surveys, and the gap between soft survey data and “hard” economic numbers remains wide.

Turning to the Fed meeting last week, the two takeaways were: 1) The Fed confirmed that they will reduce the balance sheet in September, barring any big economic or inflation surprises. 2) The Fed did slightly downgrade the inflation outlook, but importantly it kept open the option to hike rates at any meeting, and as such a December rate hike is still likely).

This Week’s Preview

As stated, inflation is more important than growth data right now, so that means two most important numbers this week will be tomorrow’s Core PCE Price Index (contained in the Personal Income and Outlays report) and Friday’s wage data in the jobs report.

Stocks have rallied since Yellen turned incrementally dovish at her Humphrey-Hawkins testimony, and soft inflation data will further that sentiment and underpin stocks.

Conversely, if we see inflation bounce back, that will push bond yields higher and help reflation assets (banks, small caps, inverse bond funds, cyclicals).

But, inflation stats aren’t the only important numbers this week as we get the latest final manufacturing and composite US and global PMIs. They remain important because they will provide anecdotal insight into the pace of the US and global economy. But again, it would be a pretty big surprise if the data suddenly showed slowing in the global economy.

On the flip side, at least for the US, a strong report would be welcome, because strong economic data won’t cause the Fed to get more “hawkish” unless inflation ticks higher.

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FOMC Takeaways, July 27, 2017

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FOMC Decision
• As expected, the Fed left rates unchanged and did not alter its balance sheet.

The Fed decision met our “What’s Expected” scenario, as the Fed said balance sheet reduction “relatively soon,” which is Fed speak for September.

To boot, as was also generally expected, the Fed slightly downgraded the outlook for inflation, saying that inflation was running “below 2%,” as opposed to the previous “running somewhat” below 2%. It’s a minor change that largely reflects the Fed’s recent cautious language on inflation. However, the Fed said that risks to the recovery remained “roughly balanced,” which is Fed speak for “We still can hike rates at any meeting.” That last point is important, because risks remaining “roughly balanced” leaves a rate hike in December on the table (Fed fund futures odds have it at 50/50).

Currency and bond markets reacted “dovishly” to the decision, but again that’s due more to a Pavlovian dovish response to any Fed decision rather than an accurate reflection of the Fed yesterday. In reality, the Fed wasn’t materially dovish.

Bottom line, the policy outlook remains the same: The Fed will reduce its balance sheet in September, and likely will hike rates again in December, barring any economic slowdown or further decline in inflation statistics (at which point both events will become less certain). That was the market’s expectation before the Fed meeting Wednesday, and that’s the market expectation
after the Fed decision.


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FOMC Preview and Projections plus the Wildcard to Watch, July 25, 2017

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Tomorrow’s FOMC meeting is important to markets for multiple reasons, because it will give us additional color on when the Fed will begin to reduce its balance sheet, and whether a December rate hike is still on the table.

Those revelations will be the latest catalyst for the ongoing battle between “reflation” (which means cyclical sectors like banks, industrials and small caps outperform) or “stagnation” (super-cap tech and defensive sector out-performance).

Given the latter sectors have been the key to outperforming the markets in 2017, understanding what the Fed means for these sectors is critically important. Remember, it was the Fed’s “hawkish” June statement that saw Treasury yields rise and banks and small caps outperform from June through mid-July. And, it was Yellen’s “dovish” Humphrey-Hawkins testimony that reversed the rise in yields and resulted in the two-week outperformance of super-cap tech (FDN) and defensive sectors such as utilities. So again, while not dominating the headlines, the Fed is still an important influence over the markets, just on more of a micro-economic level.

What’s Expected: No Change to Interest Rates or Balance Sheet Policy. The Fed is not expected to make any change to rates (so no hike) or begin the reduction of the balance sheet. However, and this is important, the Fed is expected to clearly signal that balance sheet reduction will begin in September by altering the fifth paragraph to state that balance sheet normalization will begin “soon” or “at the next meeting.” Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Hawkish If: The Fed Reduces the Balance Sheet. This would be a legitimate hawkish shock, as everyone expects the Fed to start balance sheet reduction in September. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Dovish If: No Hint At Balance Sheet Reduction. If the Fed leaves the language in paragraph five unchanged (and says balance sheet reduction will happen “this year”) markets will react dovishly, as balance sheet reduction likely won’t start until after September, and that means no more rate hikes in 2017. Likely Market Reaction: Withheld for Sevens Report subscribers. Unlock by starting your free trial today.

Wild Card to Watch: Inflation Language.

So far, the Fed has been pretty dismissive regarding the undershoot of inflation, but that may change in tomorrow’s statement. If the Fed reduces its outlook on inflation (implying low inflation isn’t just temporary) or, more significantly, implies the risks are no longer “roughly balanced” (which is Fed speak for we can hike at any meeting), then a December rate hike will be off the table, and that will result in a likely significantly dovish move. If made, that change will come at the end of the second paragraph.

Bottom Line

To the casual observer, this Fed meeting might look like a non-event, but there are a lot of potential changes that could have significant implications on sector performance over the next few months. So, again, getting this Fed meeting “right” will be important from an asset allocation standpoint.

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Weekly Market Cheat Sheet, July 24, 2017

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Last Week in Review

The economic calendar picks up this week beginning with the flash PMI today (9:45 a.m. ET), as we continue to get an initial look at the July data. So far, the data has been a bit underwhelming as both the Empire and Philly Fed surveys came in light last week.

As far as hard data goes, Durable Goods comes out Thursday, and the preliminary second-quarter GDP number comes out Friday.

Housing data also picks up this week, and after last week’s mixed results (remember the Housing Market Index missed but Housing Starts was solid) economists will be looking for a better read on the current status of the real estate market. The two big reports this week are Existing Home Sales on Monday, and New Home Sales on Wednesday. However, the S&P CoreLogic Case-Shiller HPI also will be worth watching (due out Tuesday). If the housing data is more in line with the strong Housing Starts data we saw last week, that will be an underlying positive for the economy and supportive for risk assets near term.

Turning to the central banks, the FOMC meets Tuesday and Wednesday, and the meeting will be concluded with an announcement on Wednesday at 2:00 p.m. There are no material changes expected to come from the meeting, and it would be a shock if rates were not left unchanged. There is no press conference or forecasts released with this meeting, but language in the statement will be closely watched for any further clues on the Fed’s plans to reduce the balance sheet, or on when rates will be raised. Right now, expectations are for a December hike, but based on the trend in other central bank rhetoric the risk is for a dovish development due to the complete lack of inflation acceleration.

This Week’s Preview

Economic data was thin last week, but we did get our first look at July data in the form of regional Fed outlook surveys as well as a few reports on the housing markets.

Beginning with the Fed surveys, the Empire State Manufacturing Survey was released on Monday, and despite the bad headline it was not a terrible report. The headline missed estimates (9.8 vs. E: 15.0), but the forward looking New Orders component remained solidly above 13. The reason the report was not that bad was the fact that it had started to run hot at unsustainable level recently, and was due for a dip. And the correction we saw in the June data wasn’t too deep, and the details remained encouraging.

The Philly Fed Survey out on Thursday was not as bad a miss as the Empire data on the headline (19.5 vs. E: 22.0), but the details definitely dimmed the outlook for the Mid-Atlantic manufacturing sector. The forward-looking component of the report, New Orders, fell more than 20 points to just 2.1. The survey Philly data last week finally started to show a decline in enthusiasm from the extremely strong survey reports we’ve seen since the election. If these reports are foreshadowing a pullback in the broader US economy, that would be very bad for stocks, as solid growth is still priced into the market at current levels.

Housing data was mixed last week as the Housing Market Index missed expectations, but Housing Starts and Permits were very solid. Data on the real estate market has been all over the place recently, and it will take more data to try to decipher where the trends actually are in the sector. But if the strong Starts and Permits data from last week are any indication (this is a more material data point than the Housing Market Index) that will be a sign of confidence in the US economy.

Lastly, jobless claims were very solid last week as new claims fell back towards a four-decade low. The very positive weekly report was significant, because the data collected corresponds with the survey week for the July BLS Employment report. So, based on jobless claims alone we can expect another very strong official employment report early next month.

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Goldilocks Jobs Report Preview, July 6, 2017

Goldilocks Jobs Report Preview: What Will Make the Report too Hot, too Cold, or Just Right?

Given the Fed’s newfound confidence in inflation and economic growth, the bigger risk for stocks will be if tomorrow’s number comes in “Too Cold,” and further implies the economy is losing momentum into a hiking cycle.

However, while a “Too Cold” scenario would likely be the worst outcome for stocks, “Too Hot” wouldn’t be ideal, either, as it would cause a resumption of the reflation trade we saw in June.

So, there are two-sided risks into tomorrow’s jobs report, and if it’s outside of the “Just Right” scenario, we will either see some important sector rotation, or a broader market movement.


jobs report

“Too Hot” Scenario (Potential for Two More Rate Hikes in 2017)

>250k Job Adds, < 4.1% Unemployment, > 2.9% YOY wage increase. A number this hot will open the discussion for another rate hike, likely in September or November.

Likely Market Reaction: We should see a powerful reengagement of the “reflation trade” from June… (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Just Right” Scenario (Confirms expectations of September balance sheet reduction & December rate hike)

125k–250k Job Adds, > 4.1% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would reinforce the current expectation of balance sheet reduction in September, and one more 25-bps rate hike in December.

Likely Market Reaction: This is the most positive outcome for stocks… (withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

“Too Cold” Scenario (Economic Growth Potentially Stalling)

< 125k Job Adds. The key to a sustained, longer term breakout in stocks is stronger economic growth that leads to higher interest rates, and a soft number here would further undermine that outcome, and imply the Fed is hiking rates into an economy that is losing momentum.

Likely Market Reaction: (Withheld for subscribers only—unlock specifics and ETFs by signing up for a free two-week trial).

Again, given the Fed and other central banks newfound hawkishness, this is the worst outcome for stocks over the coming weeks and months.

Bottom Line

This jobs report isn’t important because it will materially alter the Fed’s near-term outlook. Instead, it’s important because if it prints “Too Cold” it could send bonds and bank stocks through their 2017 lows. And while I respect the fact that stocks have been able to withstand that underperformance so far in 2017, I don’t think the broad market can withstand new lows in yields and banks.

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Market Implications of Fed Vice Chair Dudley’s Optimistic Statements

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What are the market implications the optimistic statements from Fed Vice Chair (and President of the Federal Reserve Bank of New York) William Dudley’s optimistic statements this week?

Fed Vice Chair Dudley reiterated and bolstered Fed Chair Yellen’s “steady as she goes” message on rate increases last week, again dismissing low inflation as not a big enough problem to stop the Fed from continuing to hike.

Additionally, Dudley was optimistic about economic growth, saying he was “confident” the current economic expansion had plenty left in the tank.

Bottom line, Dudley reiterated that the Fed is committed to raising interest rates and removing accommodation, and that caused a mildly “hawkish” reaction across currencies and bonds.

It also helped push stocks higher (although stocks were already in rally mode). So, our general Fed outlook remains the same: Balance sheet reduction starting in September, and a rate hike in December.

However, in order for the hawkish tone from the Fed to get the Dollar Index and yields moving higher, we’ll have to see actual improvement in the economic data, and that remains elusive. As such, the market remains skeptical about future rate hikes, despite the Fed’s warnings (Fed fund futures are pricing in just a 20% chance of a September hike, and 40% chance of a December hike). So, the Fed has some work left to do on reestablishing its hawkish credibility after years of ultra-dovishness.

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