"People stop buying things, and that is how you turn a slowdown into a recession." -- Janet Yellen
"You don't say.". -- Your old buddy.
Up All Night
The June FOMC meeting has come and gone. I fear the repercussions of said meeting may be with us for a while. Market reaction was at first rather muted. Perhaps we should give credit to Fed Chair Janet Yellen for properly preparing the marketplace. For she, and her entire crew, have certainly done that. Their collective intent has been crystal clear for months on end. They are simply attempting to implement what they have put forth first in both spoken, and written word. I wish I could feel the joy that I would have felt if they had tackled their extraordinarily loose monetary policy and gargantuan balance in 2013, or 2014, when the economy actually had strung together some stronger quarters than we have seen more recently.
Yeah, you're right, the moves would have been criticized at that time as well, but now, tightening when the data does not truly support the trajectory of intent? The moves seem forced, and at least to this trader/investor, the Fed seems scared. If they are so scared, maybe I should be too. That's what rattled around in my head all night as CNBC's Mad Money turned into the Mets and Cubs, and then the Mets and Cubs turned into the never-ending drivel of politicized news that cable TV pumps out 24/7. My brain was stuck on the ramifications of policy implementation.
Enter the Plate Spinners
The FOMC announced a 25 basis point increase for the fed funds rate to a range of 1% to 1.25%. That is fine. The increase was priced into the markets, and easily absorbed well ahead of this meeting. I think the problem for me, at least, is that 12 of 16 are in favor of another rate increase this year, and seem to be pointing toward a fed funds rate that lands at 2.1% by next year and 3% by 2019. This same crew expects economic growth to weaken from 2017 into 2018, and then again from 2018 into 2019, and then weaken still from 2019 into the great beyond. What the heck? It gets better. The median forecast made by this group also suggests that while inflation will be much softer than previously expected for this year, both consumer level inflation and core consumer inflation are to hit 2% by next year. Then stay there forever, which means either that folks aren't really doing their homework, or they treated this as a group assignment. I would rather have independently derived professional opinion.
A Worthy Plan
On top of that, while tightening interest rate policy, the Fed expects to get the ball rolling on balance sheet management this year. The plan laid out is not a bad one. I actually think that a plan that defines a certain amount ($6.0 billion in Treasuries and $4 billion in mortgage-backed securities) to be rolled off of the balance sheet at maturity and not reinvested is a good one. This would reduce the Fed's credit footprint and improve the central bank's flexibility the next time that the fear factor shows up in size. My question is: Will the Fed force upon us the very day that they seem to be preparing for in such haste, after not preparing at all for so very long? The official statement paints a pretty picture, making the wonders of the labor market, household spending, and business fixed investment seem stronger than they probably are. These items are to some degree strengths, but I don't think anyone would argue that the economy is in a sweet spot for tightening policy.
I truly think that it would have been prudent for the Fed to announce a pause in their intent on interest rate trajectory while kicking off the management of the balance sheet. In other words, see how the economy reacts to downsizing the balance sheet before firing all of your rounds. The intent of the FOMC is to run this program in the background, as if it were on autopilot. I think that to do this could prove impossible, and that to try to raise interest rates regularly, while also cleaning up this mess could tighten monetary conditions a bit too much, too quickly going forward. Of course, they are hopefully not robots, and cleaning up the balance sheet could be put off, halted or even reversed if need be. Dr. Yellen seemed really hawkish, and some of her crew over the last few months appeared driven to stay on message. Their collective fear is evident.
What do we, who run our own money, do now? Well, TheStreet, in what now seems like very timely fashion, ran a June roundtable themed on the longevity of the current economic expansion, and how to approach the next recession. I am not calling for recession, mind you, but the Fed has a way of overdoing it when they do anything. My spider sense is tingling. Yesterday's announcements have put upward pressure on the U.S. dollar and compressed the 2/10-year spread on Treasury yields to levels between 0.75% and 0.8%. A rapidly flattening yield spread is not usually seen as the forerunner of a booming economy for those of you who may be new to this sport.
What the Fed's moves do to me is force me to go through all of my portfolios and pick out some winners that I am not willing to risk going forward, and turn them into cash. I am a chameleon; I don't have favorite sectors or stocks. My only preferences are positive returns, and when the 'Ugly Stick" is out -- capital preservation. I would likely revamp my debt and metals allocations to lower levels, if I could trust the Fed not to fail in their mission. I will not, however, rush into that decision, as I just cannot see any group of sentient beings gleefully tightening policy as they watch (by their own projections) GDP slow year after year. Their double-barreled plan does not work unless economic growth explodes to the upside. Helmets, flak jackets, and gas masks, gang. Could be a rough morning.
P.S. - Does anyone else find it amusing that the Fed, with a lack of inflation, is raising rates, while the Bank of England, with a level of inflation that is outgrowing British wages, cannot?
08:30 - Initial Jobless Claims (Weekly): Expecting 242,000, Last Week 245,000. We could skip right over this one, and given the sheer number of economic data-points scheduled for release today, that is a tempting thought. One of these days, I suppose that we'll see a shocking print in this space, just doubt that it will be today. The four-week moving average is 242,000 (also our expectation), and the entire consensus range spans only from 240,000 to 245,000. The markets sleepwalk through this one these days.
08:30 - Philadelphia Fed Manufacturing Index (June): Expecting 25.2, May 38.8. This is the most important of all of our monthly regional manufacturing surveys. Philadelphia was the strongest region last month, displaying continued strength in new orders, shipments, and pricing. Inventories, however showed signs of slowing down. This will likely impact the futures markets more so than any other 8:30 release today.
08:30 - Empire State Manufacturing Survey (June): Expecting 4.7, May -1.0. At the same time as Philly, we'll hear from what was the weakling in the manufacturing space last month, New York. The New York region saw not only headline contraction in May, but important sub-components such as new orders, unfilled orders, and inventories all showed up wearing minus signs. Expectations are for (hopefully) headline expansion today. Last month, the Empire State became the first of the five major Federal Reserve districts to show evidence of contraction in the manufacturing sector since October.
08:30 - Import Prices (May): Expecting -0.1%, April 0.5% m/m.
08:30 - Export Prices (May): Expecting 0.1%, April 0.2% m/m. Import prices were significantly stronger in April on rising oil prices. We all know how crude did in May. Hence, the expectation is for month over month contraction on that line. Export prices got some help in April from sales in the agriculture space. That, too, is expected to have dissipated somewhat in May. Due to the dominance of oil/agriculture, these data-points are no longer looked at as representative of cross-border demand.
09:15 - Industrial Production (May): Expecting 0.2%, April 1.0% m/m.
09:15 - Capacity Utilization (May): Expecting 76.8%, April 76.7%. As much as auto sales pushed production in April, they will be a drag on May's numbers. You should still have enough (hopefully) production in consumer goods to keep this item above the flat-line for the month. Utilization has been steadily ramping higher since December, and that's a trend that economists could find very discouraging should it reverse.
10:00 - NAHB Housing Market Index (June): Expecting 70, May 70. The "Home-builder Optimism Index" hit peak levels in January, and has pretty much stayed right there all year so far. For those that do not follow all of this macro so closely, 50 is the divide between optimism and pessimism for this one. Well, the northeast is the region that has badly lagged the rest of the country for quite a while if you look into these numbers. The northeast finally hit 50 on the nose in May after spending most of 2016 and 2017 in the 30s and 40s. By the way, the western region hit 80 last month.
10:30 - Natural Gas Inventories (Weekly): Expecting 95 billion, Last Week 106 billion cubic feet. Natural gas appears to be headed for its eleventh consecutive weekly inventory build today, and the size of those builds just keeps growing. two weeks ago. I told you right here that $2.92 was the spot to worry about for Natty Gas. Well, here we are. This spot cracks, and you could end up screwing around with levels close to $2.50.
16:00 - TIC (April): Expecting $37.3 billion, March $59.8 billion. This measure of cross-border investment showed a strong positive for March, basically on the fact that Chinese increased their total holdings of US Treasuries that month by over $30 billion. Given the lag in this information and the time of day when it is released, this will not impact most of you directly at the time it hits the tape. Still, darned interesting.
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: 2457, 2447, 2441, 2429, 2420, 2410
RUT: 1433, 1426, 1419, 1411, 1403, 1396
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (FNSR) ($0.15)
What's Hot on TheStreet
Beware Tesla fanboys: Tesla (TSLA) burning money, but shareholders are the likely ones to blister and feel the pain. The standard 90-day corporate equity lockup period for Tesla, following its $402.5 million stock sale of March 16, ends Thursday TheStreet reports. As a result, Tesla will be free to conduct another stock offering as soon as Thursday, which is a real possibility given the electric car company's debt situation, partly due to its Solar City investment, and need for additional cash. Any new issuance the company may seek would likely need to take place before July, which is when Tesla issues its quarterly report on car sales. Alternatively, an offering could come in late August after Tesla issues its quarterly financial report.
Shares could start to come under pressure.
Mining stocks get whipped: Global mining stocks found themselves in a hole Thursday TheStreet reports, after South Africa's government said that at least 30% of domestic mining assets should be black-owned even if previous black owners sell their stakes. South African-exposed mining companies fell sharply in the wake of the announcement. London-listed Anglo American plc (AAUKF) tumbled 4.4% to 1,013 pence ($23.87) a share, South32 Ltd fell 4% to 158 pence, BHP Billiton plc (BHP) was down 2% to 1,155 pence, Rio Tinto (RIO) fell 2% to 3,079 pence and Glencore plc (GLNCY) fell 2.6% to 279.2 pence. South African gold producers were hit even harder. Sibanye Gold Ltd. (SBGLF) plummeted 6.7% to 1,562 South African rand ($121.38) and AngloGold Ashanti Ltd. (AU) fell 4.8% to 14,015 rand.
Amazon eyes a new prize: Amazon (AMZN) may be preparing a deal to buy Slack Technologies in a deal that could value the messaging startup group at more than $9 billion, TheStreet points out. With Microsoft's (MSFT) deal for LinkedIn being well-received, this deal seems logical for an Amazon that is aggressively expanding into the cloud.
One has to wonder though: why isn't Apple (AAPL) considering Slack or for that matter, Twitter (TWTR) . Each service would provide valuable insight into human behavior from which to build new products and services.
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