U Turn Complete

U Turn Complete.  After a Trump comment and a very dovish Fed, markets took investors on a wild ride yesterday ultimately closing mixed to mostly down.  Yesterday’s session was jam-packed with emotional twists and turns as traders were trying to figure out if bad is good or bad is bad.


1)  The Fed has made a complete policy U turn.  Yesterday, the Fed announced that they were leaving rates unchanged and that they expect rates to remain unchanged for 2019.  The revelation of “no further hikes for 2019” came from the controversial Dot Plot.  To learn more about the Dot Plot read my geek-out note from yesterday here:  https://www.siebertnet.com/blog/wp-content/uploads/2019/03/geek-out-topic-Dot-Plot.pdf .  Though yesterday’s policy statement was largely expected it represents a Fed that is now as dovish as it can get short of easing monetary policy.

2) The Fed is going to wind down its balance sheet normalization.  The FOMC decided to begin slowing down bond sales in May and stop completely by September.  This is viewed as a dovish move, as bond sales take liquidity out of the money supply.  Though this is mostly psychological, it sends a clear message that the Fed is seeking to appease the markets.

3)  The Fed has lowered its expectations for GDP growth.  The Fed cut its 2019 GDP growth forecast to an annual rate of +2.1% from +2.3%.  Additionally, they cut 2020 expectations to +1.9% from +2.0%. The slowing of the economy is just one of the many reasons for the dovish shift cited by Chairman Powell.  Other things on the Fed’s worry list are global growth, Brexit uncertainty, a Chinese economic slowdown, and lingering trade issues.

4)  President Trump hinted that closing a deal with China may not be as simple as many think. Yesterday, Trump announced that tariffs on $250 billion Chinese exports will remain in place for a “substantial period of time”.  It is unclear if his statement was a simple message of brinksmanship meant to get his Chinese counterparts to move off of a sticking point or a message to the public that things are not going well with negotiations.  One thing is clear, the stock markets did not approve.


Yesterdays session was as wild as it gets for all markets.  Stocks opened with a positive bias on hopes of more Fed stimulus only to be deflated by a Trump statement regarding Chinese tariffs.  The negative statement sent stocks into the red only to be wrenched into the green by the FOMC’s dovish policy statement.  The dovish Fed gesture ultimately lost its power of levitation as stocks sold off into the close. The S&P500 closed out the session down -0.29%, the Dow Jones Industrial Average closed off by -0.55%, the Russell 2000 slipped by -0.76%, and the NASDAQ closed up by +0.43%.  It is clear from the market’s response that while lower rates for longer is good (THE SYMPTOM), lower economic growth expectations is bad (THE CAUSE).  By yesterday’s close, many traders were left wondering what the Fed is seeing that caused them to complete the dovish shift that began in the final days of 2018.  The Fed has been very careful in its wording but the message is clear for those who want to listen:  the economy is slowing, wage growth is tepid, inflation is softening, and the global economy is sending mixed messages.  All of these are not necessarily pointing to a recession but growth expectations for the next 24 months should be paired back to minimize downside risk.  The dovish part of the Fed’s statement had a negative effect on the finance sector yesterday, particularly the regional banks that rely on rate spreads to make money in lending.  The Finance sector was the worst performing sector in yesterday’s session, losing -3.7%.  Also affected by the Fed policy was the US dollar which lost ground against other currencies.  Recall that a strong economy with rising rates causes a currency to rise and yesterday’s Fed statement offered the opposite causing the dollar index to drop by -0.65%, which is a sizable drop for the index.  Finally there is the ever-so-practical bond market which rallied on the Fed release as it confirmed the thesis held by many bond traders that the economy is slowing.  By announcing the end of balance sheet normalization, thus lowering supply and sell pressure, the Fed gave bond traders more reason to be bullish.  The aggregate bond index traded up by +0.35%, the ten year treasury yield fell to 2.52%, and the 2/10 yield curve flattened to +12 basis points.  The front end of the yield curve remains inverted out to 5 years and investors would only pick up 2 basis points if they chose to lend money for 7 years versus 2 years.  Two basis points is 2 on-hundreths of a percent – that’s small.


This morning we will get the Philadelphia Fed Business Outlook which is expected to come in at +4.8% versus last month’s fall of -4.1%.  Later this morning the conference board will deliver its Leading Index, which is expected to show a growth of +0.1% versus last month’s decline of -0.1%.  The LEI number is a key factor in GDP forecasting so expect some sensitivity around this number in light of yesterday’s Fed pronouncements.  Boeing will get some more negative attention today as reports surfaced that the FBI is involved in an investigation into how the company received FAA approval for its Max 8 jet.  Today will also be filled with much discussion on yesterday’s Fed meeting.

daily chartbook 2019-03-21


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