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Why Powell Wasn’t Dovish (Tapering is Coming)

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What’s in Today’s Report:

  • Why Powell Wasn’t Dovish (Tapering is Coming)
  • Infrastructure Update (Tax Hike Risks)
  • Oil Update, EIA Analysis, and OPEC Outlook (Where is Oil Going?)

Futures are modestly lower following mixed Chinese economic data.

Chinese Fixed Asset Investment, Retail Sales, and Industrial Production all beat estimates, although they were offset by a miss in Q1 GDP (7.9% vs. (E) 8.2%).  But, while GDP got most of the headlines, the bottom line is the rest of the data is more current, and on balance, the outlook for the Chinese economy has improved (which is good for global stocks).

Today there are numerous economic reports to watch including, in order of importance:   Philly Fed Manufacturing Index (E: 28.5), Empire State Manufacturing Index (E: 18.3), Jobless Claims (E: 368K), and Industrial Production (E: 0.7%).  As has been the case “Goldilocks” data with muted pricing indices will help stocks rally (markets won’t want to see data that’s too strong or too weak).

Turning to the Fed, Chair Powell speaks to the Senate at 9:30 a.m. ET but we should expect the same message as Wednesday and his comments shouldn’t move markets.

Finally, earnings season continues to gain momentum and some reports we’ll be watching today include: TSC ($0.89), MS ($1.63), UNH ($4.41), USB ($1.14), BK ($1.01).

CPI Takeaways

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What’s in Today’s Report:

  • CPI Takeaways

Stock futures are little changed as Treasuries recover some of yesterday’s losses ahead of more U.S. inflation data and Congressional testimony from Fed Chair Powell today.

Economically, U.K. CPI was above estimates in June but PPI was unexpectedly soft while Eurozone Industrial Production also disappointed, but none of the data from overnight seems to be having a material impact on markets this morning.

Today, there is one more inflation report in the U.S., PPI (E: 0.6% m/m, 6.8% y/y) at 8:30 a.m. ET and then focus will turn to Fed speak with Chair Powell’s semiannual testimony before Congress beginning at 12:00 p.m. ET and Kashkari also speaking at 1:30 p.m. ET.

The start of Q2 earnings season will also remain in focus with notable reports coming from: WFC ($0.97), BAC ($0.78), C ($1.99), DAL (-$1.37), BLK ($9.24), and PNC ($4.22).

Economic Breaker Panel: June Update

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What’s in Today’s Report:

  • Sevens Report Economic Breaker Panel: June Update

U.S. equity futures are flat this morning after wavering between gains and losses overnight as investors continue to digest the whipsaw moves across asset classes since last week’s Fed meeting and look ahead to more commentary from Chair Powell today.

There were no market-moving economic reports overnight.

Today, there is just one economic report to watch: Existing Home Sales (E: 5.715M) but the release is not likely to materially move markets.

That will leave investors focused on the Fed with several officials speaking today including: Mester (10:30 a.m. ET), Daly (11:00 a.m. ET), and Powell (2:00 p.m. ET). Powell’s testimony before Congress this afternoon will be the main event of the session as he is likely to discuss the Fed’s plans to balance rising inflation with the still fragile economic recovery.

Finally, there is a 2-Yr Treasury Note auction at 1:00 p.m. ET that could offer some insight into the market’s expectations for Fed policy as the short end of the yield curve has moved sharply higher since last week’s FOMC meeting.

Fed Day

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What’s in Today’s Report:

  • PPI – Where Will Inflation Settle?
  • Empire State Manufacturing Survey Misses Estimates
  • Retail Sales – Spending Shift from Goods to Services
  • A Warning Sign from Dr. Copper

Stock futures are flat this morning as a sense of Fed paralysis grips global markets ahead of the FOMC announcement while economic data disappointed overnight.

Chinese Fixed Asset Investment, Industrial Production and Retail Sales data all missed estimates for the month of May which resulted in Asian markets underperforming overnight.

Looking into this morning’s trading session, there are two lesser followed economic reports due to be released: Housing Starts (E: 1.630M) and Import & Export Prices (E: 0.7%, 0.7%) but neither release should move markets with the Fed looming.

The Biden-Putin meeting in Geneva will also get media attention but it is very unlikely to actually impact markets. Treasury Secretary Janet Yellen’s testimony before Congress regarding Biden’s budget (10:00 a.m. ET), however, could move markets as she will likely be discussing taxes and any hint of a material hike in capital gains rates or corporate tax rates could weigh on markets even ahead of the Fed.

Today’s main event for the markets will of course be the conclusion of the June Fed meeting with the FOMC Meeting Announcement at 2:00 p.m. ET and then Fed Chair Powell’s Press Conference at 2:30 p.m. ET. If anything causes tapering expectations to be pulled forward towards September or evidence emerges of plans to raise rates in 2022, that will be viewed as hawkish and cause significant volatility across assets classes. Otherwise, an “as expected” or dovish meeting outcome will likely result in equities continuing to trade at or near all-time highs.

FOMC Preview

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What’s in Today’s Report:

  • FOMC Preview
  • Gold Update: Technical Weakness Ahead of the Fed

Futures are little changed this morning as investors weigh dovish central bank developments against in-line inflation data in Europe as focus turns to U.S. data and the Fed.

The RBA minutes revealed policy makers are open to extending QE beyond the current September deadline while CPI reports in Europe all met estimates.

This morning is lining up to be a busy one from a potential catalyst standpoint with a slew of economic data due to be released including: PPI (E: 0.6%), Retail Sales (E: -0.4%), Empire State Manufacturing Index (E: 22.0), Industrial Production (E: 0.6%), and Housing Market Index (E: 83).

The June FOMC Meeting also begins today which will likely initiate a sense of market paralysis ahead of tomorrow’s announcement and Powell’s press conference however a 20-Year Treasury Bond auction at 1:00 p.m. ET could move Treasuries and ultimately impact stocks in the early afternoon.

Powell Speech Preview

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What’s in Today’s Report:

  • Powell Speech Preview
  • Can Strong Consumer Spending Prevent a Recession?

Futures are marginally higher following a quiet night as trader position ahead of the Powell speech later this morning.

Economic data was sparse overnight although core Japanese CPI met expectations at 0.6% y/y.

There was no trade news overnight although Kudlow (Director of the National Economic Council) said discussions between the U.S. and China were “productive” on Wednesday (although he always says that).

Today the big event is the Powell speech at 10:00 a.m. ET. From a market standpoint, the 10’s-2’s spread will tell us whether the speech is positive or negative for stocks.  If Powell is sufficiently dovish, then 10’s-2’s should widen out towards 5 basis points, and that should help stocks rally.  Conversely, if Powell is not sufficiently dovish, 10s’-2’s will invert, likely notably, and in that case, if could get a bit ugly for stocks in the afternoon.

Tom Essaye Quoted in MarketWatch on July 10, 2019

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“Powell has a tough job ahead of him. The market is pricing in a 97% chance of a July rate cut, and a 75% chance of one in September.” says the Seven Report’s Tom Essaye. Click here to read the full MarketWatch article.

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Finding Attractive Risk/Reward in This Market

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What’s in Today’s Report:

  • Why Powell Was Dovish
  • Where Can We Find Attractive Risk/Reward?  Emerging Market Bonds
  • Energy Outlook (Slightly Positive)

Futures are marginally higher thanks to continued momentum from yesterday’s dovish rally.

Economic data was sparse overnight as the only notable number was German CPI, which met expectations at 1.6% yoy.

Today will be a busy day.  First, we get the 2nd half of Powell’s testimony in front of the Senate Banking Committee at 10:00 a.m. ET, but that shouldn’t yield any surprises as it’s mostly a repeat of yesterday.

The ECB Minutes will be released at 7:30 a.m. ET and if they hint at a re-start of QE (which they probably will) then we might see an extensions of this “dovish” rally.

On the data front, CPI (E: 0.0%) and Jobless Claims (E: 216K) both get released later this morning but given the flood of dovishness inundating markets right now from global central banks, it’d take a very strong CPI and very high jobless claims to hit stocks.

Finally, there are multiple Fed speakers today besides Powell, but they are all generally overshadowed by the comments yesterday so the market should largely ignore their speeches.  Today’s roster includes: Williams (11:00 a.m., 1:30 p.m. ET), Quarles (1:30 p.m. ET), Kashkari (5:00 p.m. ET).

Tom Essaye Quoted in MarketWatch on May 2, 2019

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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.

Fed Takeaways

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What’s in Today’s Report:

  • Fed Decision Takeaways
  • Why the Italian Budget Matters to You

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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