"I always expect unexpected challenges. Boxing is not an easy sport." -- Sugar Ray Leonard
Sharp crack to the ribcage. "Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year". That's straight from the March FOMC Minutes. In plain English, those currently at the Fed expect monetary conditions to become considerably tighter before the music stops. Those on the committee also inappropriately discussed equity market valuations, which I would think to be far outside the scope of what should be their focus.
Not that anyone thought that they would never attempt to let some air out of that fat $4.5 trillion balance sheet. I had, in fact, long argued that they should attempt to address this 800-pound gorilla prior to even setting out on a tightening cycle. That kind of hindsight does not serve purpose here, though. Opinion is meaningless. What is, simply is ... what is. We adapt. So be it.
The plan to manage the balance sheet, at least what we are now privy to, does not appear to be a plan at all just yet. Any detail? None. There are four questions that come to mind as I think on this. The first three will set up number four, which is perhaps the most important.
1) What? Exactly.
2) When? One, or two more hikes prior to it?
3) The Pace? A gradual tapering seems to make sense to me.
4) How will, not only bond markets, but all financial markets react as interest rate volatility is introduced to a generation of traders that have never experienced normal market conditions, let alone whatever this abnormal condition hatches? Hmmm.
My thoughts on this are that they put a halt to the re-investment into mortgage backed securities first, which has recently been roughly $20 billion-$30 billion a month. The big fish will be when they get down to Treasuries. The Fed has been purchasing its portion away from the U.S. Treasury's regular auction process. The extra supply should put the whammy on bid to covers and yields awarded. You would think, maybe, that this would have been attempted when rates were lower (there I go again). The Minutes also stated that the Fed would give us plenty of notice prior to taking action on this, which means the clock is ticking on this particular crew with this particular posture on policy. What does a Trumpian Fed look like? That's going to matter. Real soon.
There was a moment there yesterday afternoon when the frenzy paused. The $1.3 billion sell program that apparently hit the market in the teeth post-Minutes had run its course, and equities seemed to catch their collective breath. That was when the "Ryan story" published by Reuters started being e-mailed around Wall Street. The market rebound in prices would not happen. The Speaker of the House, for some absurd reason, figured that the time was right to inform the media that tax reform would likely take longer to accomplish than repealing and replacing Obamacare. Nice job, sport. You simply can't make this stuff up. Careless is a word that comes to mind. In some circles, it's called lack of situational awareness. Not impressive, Mr. Ryan.
A Little of This for Some of That
President Trump will meet with Xi Jinping of China today. Good thing that the president didn't tweet ahead anything about these meetings being "very difficult". Oh wait ... never mind. Most important at these meetings will be opening regular and dependable lines of communication. That should be easy. Then, it gets rough. The big problem here is obviously the trade gap between the two nations, and perceived currency manipulation. The bigger problem? North Korea.
The U.S. president will press for Chinese cooperation in putting North Korea's nuclear weapons program to bed. China is probably the only nation that can bring economic pressure to bear on Pyongyang, as there is still healthy enough trade between the two. The president does have something to sell in exchange for this help. Those disputed islands in the South China Sea? Taiwan? Still think taking that phone call after the election was stupid? Not when you're a negotiator gathering your chips.
Oh, tariffs and exchange rates will also be discussed. The ground could be laid for some kind of deal down the road here as well. Maybe some kind of allowance for a continuance of the disparity in the tariffs between the two and corresponding trade deficit in exchange for help on currency valuations. It will not make the news. Not yet, anyway. I think North Korea trumps (no pun intended) trade talks for the time being, and will dominate any headlines that come out of this get together. It also happens to be fraught with danger.
08:30 - Initial Jobless Claims (Weekly):Expecting 252,000, Last Week 258,000. Does this item matter to the marketplace? Not like it used to, for a myriad of reasons. The consensus range of expectations for today spans from 245,000 to 254,000. The four-week moving average, which is the intended way of looking at this release, now stands at 254,250.
09:30 - Fed Speaker:San Francisco Fed Pres. John Williams will speak on monetary policy and natural interest rates from Frankfurt, Germany. As you likely know, Williams is highly thought of in his circles, but does not vote on policy this year. He is close to the Chair, which until recently was thought of as an asset. Williams will take questions from the media as well as the audience today.
10:30 - Natural Gas Inventories (Weekly):Expecting -23 billion, Last Week -43 billion cubic feet. Natural gas prices have been trending higher for about six weeks now, as inventories have been in a continual state of contraction since late November. The $3.25 level will act as a pivot today going into this release, for which I have seen at least one projection for a build in the space.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2370, 2362, 2351, 2345, 2337, 2327
RUT: 1365, 1358, 1351, 1341, 1335, 1327
Thursday's Earnings Highlights (Consensus EPS Expectations)
At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.