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Federal Reserve Chairman Jerome Powell made it clear the central bank will not move on interest rates unless it sees a significant and persistent move in inflation, which has been stubbornly below the Fed’s target.

Markets took Powell’s comments as dovish, meaning the Fed is leaning toward an easing policy and keeping interest rates low rather than a tightening policy, or raising interest rates. Stocks were slightly higher and Treasury yields were slightly lower. The Dow ended the day with a gain of 29 points, at 27,911.

The Fed left the fed funds rate range unchanged Wednesday at 1.50% to 1.75%. Both Powell’s comments and Fed’s statement indicated the Fed intends to remain sidelined for now, unless there’s a development to change the economic outlook or a move in inflation.

“They want to be viewed as being in neutral. And in fact, he made it clear he thinks they’re probably not really in neutral. They’re still accomodative,” said Ward McCarthy, chief financial economist at Jefferies. “The take away from that is the probability they’re going to make any changes in policy for at least six months is very low, and it would take something quite significant for that to happen.”

Economists say the outcome in trade talks between the U.S. and China could ultimately influence the Fed. They say it would quickly return to an easing stance if there’s a big negative in trade talks or some other event that would change the economic and financial outlook. President Donald Trump set Saturday as a deadline for new tariffs on Chinese goods, unless there is a trade deal.

“If you do get improvements on the trade side, growth will pick up, inflation will pick up and they’ll be happy to see both and they won’t try to stop it,” McCarthy said of the Fed.

While markets are laser focused on the Dec. 15 deadline, Powell said the Fed can’t respond to trade headlines. “We look at a range of factors. We try to look through the volatility in trade news,” he said, adding Fed officials do not set monetary policy based on the trade developments.

The Fed cut interest rates three times between July and October, before indicating it was stepping back. Economists say positive developments in the trade talks were one reason why the view on the economy improved, and the Fed’s rate cuts also took pressure off the economy.

“The fears of whether we are already heading into a recession are gone,” said Jon Hill, senior rate strategist at BMO.

He said the market had been worried about the potential for a hard Brexit for the U.K., but it does not seem that will be the outcome after the U.K. election this Thursday. The other fear, of course, had been that trade wars would hamper global growth and create a worldwide recession.

“How all this plays out a week from now will be entirely dependent on if we get a surprise in the U.K. election and what happens in the trade deal,” said Hill. “This is just an appetizer for the main course.”

Barring any negative surprises, the Fed can afford to hold policy steady even if inflation rises above its target at some point.

“They’d like inflation to go higher. We had a multi-generational strong labor market. We have all-time record highs in equities and we don’t have accelerating inflation. Of course they’d like inflation to be slightly higher. The economy is in pretty good shape,” said Hill.

The Fed issued new forecasts for the economy and interest rates Wednesday. The Fed forecasts now show no change in interest rates next year. Fed officials maintained their forecasts for the economy, with a projection for 2019 growth of 2.2% , followed in consecutive years by 2%, 1.9% and 1.8% gains.

“I think Powell wants to see how low unemployment can go, and the only number that’s going to get the Fed to deviate from the projected rate path is a significant move in inflation, either to the upside or downside,” said Drew Matus, chief market strategist at MetLife Investment Management. “It’s allowed the Fed to take a step back, rather than take center stage. It feels like an end of an era.”

Members cut their inflation expectations this year, though they see inflation finally hitting their 2% target in 2021. They now see the core personal consumption expenditures inflation measure up just 1.6% growth this year, down from the 1.8% projected in September. They kept their estimates at 1.9% in 2020 and 2% for the following two years.

“I think the most interesting aspect of the whole thing is how stable their outlooks are for the next few years. That level of stability is rare in the real world,” said Matus. “What this is telling me is they’re not expecting there’s going to be a lot of surprises near term. And if there’s no massive surprises in one direction or the other, they’re not going anywhere. Those were insurance cuts we saw. They think they’ve taken out enough insurance and now they want to be left alone.”

Author: Patti Domm

Source: CNBC: Fed not moving off sidelines unless inflation heats up and stays there, Powell emphasizes

Stock prices are bumping up against their highs, but whether they can burst through and hold gains may, for the near term, depend on what investors hear from Jerome Powell in the week ahead.

In a week stacked with major events, the Fed’s two-day meeting is likely to be the high point. The Federal Open Market Committee is expected to make its third quarter point interest rate cut Wednesday afternoon, followed by comments form Fed Chairman Powell. Those comments could be his most important message of the next few months, as investors watch to see whether he holds the door open to future rate cuts, or signals it’s time to pause, as some economists expect.

“Our view is they’ll be done after this. We’re not expecting a cut in December, and we’re not expecting cuts next year. The economy, in my mind, looks like it’s stabilizing, and there should be more evidence of that in the next couple of weeks. focusing on the labor market is the key thing,” said Drew Matus, chief market strategist at MetLife Investment Management. If the labor market holds up, expectations for rate cuts should decline. “I do think the dissenters are arguing they shouldn’t be cutting at all.”

But Matus’ view is just one of many on Wall Street. Some economists expect another cut in December, while others expect one or more cuts next year, depending on how they view the economy. Goldman Sachs economists laid out a case where the Fed will clearly signal that it plans to pause after Wednesday.

All of this could make for volatility in stocks and bonds, depending on which market view prevails in Powell’s comments. “It’s going to be choppy going into the Fed,” said Andrew Brenner of National Alliance. In the past week, yields were higher with the 10-year Treasury yield touching 1.8% Friday.

The S&P 500 was up 1.2% for the week, ending at 3,022, just below its closing high. On Friday, it briefly traded above the July 26 high of 3,025. The Dow ended the week with a gain of 0.7%, at 26,956, and it remains about 1% below its closing high.

In addition, the earnings calendar remains heavy with about 145 S&P 500 companies releasing earnings, including Alphabet Monday and big oil Exxon Mobil and Chevron Friday. On Wednesday, earnings are expected from Apple, which is setting new highs of its own.

Big economic reports

On top of that, November kicks off Friday in what looks to be the most important day for economic data of the new month. Besides the critical monthly employment report, there is the key ISM manufacturing report, expected to show a contraction in manufacturing activity for a third month.

Both reports could be distorted by the GM strike, which is expected to result in an October employment report with fewer than 100,000 jobs. According to Refinitiv, total non farm payrolls are expected to be 90,000, while manufacturing jobs are expected to decline by 50,000. That would include the impact of GM workers, but also the employees of the many suppliers and services that support the car company’s manufacturing operations.

“The jobs number will be big, but the ISM could be bigger. If that turns up, like Markit [PMI] suggested, that could be a big deal,” said Leuthold Group Chief Investment Strategist James Paulsen. On Thursday, Markit flash PMI manufacturing data for October was higher than expected, and still has not shown a contraction.

“If it turns up, I think that’s to affect a lot of people and how they feel about things. That could take on a whole new dimension of what happens to Wall Street earnings estimates,” he said.

Manufacturing data has dragged, due to the impact of tariffs and the trade war, and some big companies have taken a hit as a result, like Caterpillar which on Wednesday reported weaker than expected earnings and sales. Caterpillar also cut its outlook, in large part due to weakness in China. Caterpillar shares were slammed but on Friday, the stock was bouncing back by 3.5%.

Stocks at ‘inflection point’

Quincy Krosby, Prudential Financial’s chief market strategist, said the fact Caterpillar was able to come back at the end of the week was a positive for the market, which she says is now entering the late year seasonal period where stocks typically do well. At the same time, she said news for the market looks like it’s about to get “less bad.”

″″Less bad’ is not a full fledged agreement with China. Less bad is a truce. It means that Dec. 15 extension in tariffs does not happen,” she said, adding the market appears to be at an inflection point with investors expecting an agreement of some type between President Donald Trump and President Xi Jinping when they meet in November.

″‘I’m not bullish. I’m not bearish. I’m optimistic. This market has been led by the defensive sectors. You’re starting to see that move into consumer discretionary. It’s telling you the market is seeing growth, albeit it not stellar growth, but when it gets ‘less bad’ you’re going to see that it’s being reflected in this inflection point in the market,” said said. “We’re seeing a move more and more into the cyclical and growth sectors, and by the way, we’re seeing a steepening of the yield curve.”

The yield curve represents the difference between the yields of two different duration Treasury securities. When the curve inverts, the yield on the shorter duration security, in this case the 2-year has become higher than that of say, the 10-year. That is one part of the curve that was temporarily inverted, and if it stayed inverted it would be a recession warning.

The 10-year has been moving higher, and the 1.80% level will be important if the yield can stay above it.

“If it pushes through 1.80, you’re going to take the inversion out, by the bond market, not the Fed,” Paulsen said. Paulsen said it would be a sign of confidence in the economy if yields can push higher.

The Fed taking a pause may add to that sense. “I think most people think one more cut and done,” he said. “The bigger news will be what [Powell] says in that press conference. He can go pretty off script sometimes.”

‘Greater optimsim’ in market
Paulsen said stocks could be in a good period, and earnings news seems to be already priced in. “The data by and large has been okay. You have earnings that are okay, and there’s no sense of imminent recession. It just seems there’s greater optimism,” he said.

Of the approximately 200 S&P companies that reported by Friday morning, more than 78% have beaten on earnings per share, according to I/B/E/S data from Refinitiv. Earnings are expected to decline by 2% for the third quarter, based on estimates and results from companies that already reported.

Paulsen said there’s some sense in the market that Brexit will not end in a worst case scenario, but it is something to watch in the week ahead as British lawmakers decide whether to hold an election.

Jack Ablin, chief investment officer with Cresset Wealth Advisors, said he thinks Brexit would be a bigger deal than the trade agreement for the world economy, if it goes poorly, with the U.K. leaving the European Union with no deal. “A no deal Brexit is likely to take 2 percentage points off of British growth…It would take 1% off European growth…I think that’s significant,” Ablin said. “I think investors are underplaying it because it’s so binary. It’s hard to position for a binary outcome. If we get some resolution there, to me, that has the biggest impact for the markets.”

Week ahead calendar

Monday

Earnings: Alphabet, AT&T, Walgreens Boots Alliance, Beyond Meat, Restaurant Brands Intl, Enterprise Products, ON Semiconductor, T-Mobile US , Diamond Offshore, Vornado Realty, Everest Re, Akamai, Canon, CNA Financial, Check Point Software

8:30 a.m. Advanced economic indicators

Tuesday

Earnings: BP, General Motors, Mastercard, Merck, Pfizer, ConocoPhillips, Amgen, Electronic Arts, Chubb, Cummins, Kellogg, Corning, KKR, Martin Marietta Materials, AutoNation, GrubHub, CNX Resources, Penske Auto, Advanced Micro, Mondelez, Xerox, Allstate, Boston Properties, FireEye, Mattel

8:30 a.m. S&P/Case-Shiller home prices

10:00 a.m. Pending home sales 10:00 a.m. Consumer confidence 10:00 a.m. Housing vacancies

Wednesday

Earnings: Apple, Facebook, General Electric, Starbucks, Airbus, Bayer, AK Steel, Airbus, Sony, Samsung, Zynga, Deutsche Bank, Glaxo SmithKline, Western Digital, Cirrus Logic, Sprouts Farmers Market, Etsy, Perkin Elmer, American Water Works, MetLife, Cree, Williams Logic, Continental Resources, Wingstop, Yum Brands

8:15 a.m. ADP employment

8:30 a.m. GDP Q3 2:00 p.m. FOMC statement 2:30 p.m. Fed Chairman Jerome Powell briefing

Thursday

Earnings: Bristol-Myers Squibb, Archer Daniels Midland, Altria, Estee Lauder, Wayfair, Fiat Chrysler, BNP Paribas, Parker Hannifin, International Paper, Marathon Petroleum, Thomson Reuters, Clorox, Dunkin Brands, Hanes Brand, Abiomed, Nintendo, Encana, Kraft Heinz, U.S. Steel, Avis Budget, Pinterest Murphy Oil, Lazard, Yeti, AMC Networks, Tenneco

8:30 a.m. Initial claims

8:30 a.m. Personal Income/spending

8:30 a.m. PCE deflator

8:30 a.m. Employment cost index

9:45 a.m. Chicago PMI

Friday

Monthly vehicle sales

Earnings: Exxon Mobil, Chevron, Colgate-Palmolive, Alibaba, Abbvie, Dominion Energy, AIG, Sempra Energy, Booz Allen Hamilton, Seagate Technology, Newell Brands, TC Energy

8:30 a.m. Employment

9:45 a.m. Manufacturing PMI (Oct. final)

10:00 a.m. ISM manufacturing

10:00 a.m. Construction spending

Author: Patti Domm

Source: CNBC: The Fed and Apple earnings will make or break market’s return to record highs in the week ahead

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