Dots R Us

Dots R Us.  Markets swung wildly yesterday as investors initially rode equities up on hope for all things great only to sell off on trade fears late in the session.  Markets have priced in earnings growth, a US China trade pact, and a forever-dovish Fed – any challenge to those hopes are met with selling.


1)  The market eagerly awaits the conclusion of the Federal Open Market Committee meeting today. The Fed, which is the true single reason for the equity market’s recovery from its 4Q18 rout, is expected to hold rates steady consistent with its “patience” campaign.  Based on market behavior in recent sessions, it appears that investors are hoping for something more.  While the Fed will not likely lower rates, they could possibly announce an end to its balance sheet normalization (a dovish move), raise its inflation target (a dovish move), change the way in which it views inflation (a confusing move which will most likely be viewed as dovish), or aggressively lower dot plot expectations (a dovish message).

2)  There appears to be some snags in US Chinese trade negotiations.  A Bloomberg report suggested that Chinese negotiators are pushing back on the US regarding intellectual property rights, patents, and drug data.  Though Administration officials were quick to attempt to toe the line of “all things are awesome”, traders sold stocks on the news.  Both Steve Mnuchin and Bob Lighthizer will be in Beijing next week to further the talks.  News of their travels temporarily halted the selling, but it wasn’t enough to turn things around for equities.

3)  Turmoil continues in the UK.  One day after the Speaker of the House of Commons denied Theresa May a chance to re-introduce her plan for a vote leaving her no alternative but to go back to the EU and ask for a delay, the EU has taken a hard line approach.  The EU is likely to give May an ultimatum: either decide on a one year extension in April or risk a no-deal Brexit within 90 days.  Investors seem to show little interest in the wrangling somehow hoping for a positive outcome to what could be a really bad thing for both the UK and the EU.


Yesterday, stocks initially traded up rather aggressively ultimately losing ground on mixed messages regarding US Chinese trade negotiations.  The S&P500 fell by a modest -0.1%, the Dow Jones Industrial Average gave up -0.1%, the Russell 2000 sold off by -0.57%, and the NASDAQ 100 traded up by +0.31%.  Ten year treasury yields were up by 1 basis point to 2.61% and the 2/10 yield curve flattened slightly to +13 basis points.  Markets are showing signs of overstated optimism as traders continue to buy stocks in the shadow of weak economic data.  Yesterday morning’s misses on Factory Orders and Durable Goods Orders didn’t seem to phase traders who eyed the FOMC meeting start as something to celebrate.  It is true that the Fed is largely expected to keep rates unchanged with futures pricing in a 98% chance that rates will remain steady and 2% chance of a rate cut.  Though this fact, along with “patience” as long as inflation remains under control (which it is), should be fully baked into the markets at this point.  Perhaps investors are hoping for some more relief in the form of an ending to balance sheet normalization in which the Fed is unwinding its bloated balance sheet.  The move would be considered to be accommodative by investors.  Bonds have already priced in most of what the Fed can give and in fact, the complacency of the bond markets puts the Fed in a difficult position.  A flattening yield curve with an invested front end shows that bond traders are expecting the worst in the economy.  The Fed, not wishing to see the curve invert may find itself in an uncomfortable position to have to jolt the markets with something less-than-happy, even though equity markets would not respond well.  Many traders will carefully parse the policy statement as well as the Chairman’s Q&A session that follows.  Also on deck today is the release of the Fed’s latest dot plot, which will also be a hot topic of discussion.  Because of the dot plot’s importance and because it is geek-out Wednesday, I thought it would be a good time to delve deeper into the topic in the ATTACHED document.


Today will be all about the FOMC meeting which will conclude in a policy statement and press conference at 2:00 PM eastern.  Rates are expected to remain unchanged but investors will want to hear more about balance sheet policy, inflation targets, and interest rate projections (the dot plot). Economists believe that the dot plot will show one projected rate hike in 2019, down from the two predicted in December’s release. The Fed is also expected to announce an end to its balance sheet normalization.  General Mills and Micron will announce earnings before the bell and Williams Sonoma will report after the close.  Fedex will be under pressure today after missing earnings yesterday and lowering 2019 guidance.  Boeing will also get attention today as the Government announced plans to investigate potential wrongdoing in the 737 Max 8’s safety approval process.

daily chartbook 2019-03-20

geek-out topic Dot Plot


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