"We really can't forecast all that well, and yet we pretend that we can, but we really can't." -- Alan Greenspan
Dudley Do Right?
William Dudley, the regional district president of the New York Fed, is considered to be influential at the Federal Reserve Bank. Holding a permanent voting seat at the FOMC table, as the leader in New York is entitled to, his words are parsed nearly as closely as are those of the Fed Chair herself. Yesterday, Dudley told the Associated Press that he would indeed favor raising the fed funds rate for a third time this year as long as the economy were there to support such a move. I know what you're thinking. No kidding. Simplistic. In a way, that's like saying that I'll probably sleep tonight as long as I get tired, or I'll eat lunch later if I get hungry.
It's not so much about stating the obvious as it is about putting the expectation that anything could happen back into the marketplace. Though personally I think it could end up being a mistake if the Fed were to launch the program that will methodically reduce balance sheet risk while also maintaining the current trajectory of interest rate policy, Dudley is not making a mistake in forcing market participants to refrain from pricing out such a possibility. The probability of one more increase in the fed fund rate (as priced in by futures trading at the CME) moved up from roughly 40% to slightly above 49%, which is where they should be (50/50) at this point in the year, and in the recovery. That's my opinion. William Dudley's finesse here, if intentional, was spectacular. Though I would knock the Fed given a chance, wouldn't you? That day will come.
This Week Matters
Though the U.S. economy continues to stumble in certain areas, most noticeably in such areas as consumer level inflation and personal income, there are other areas such as the labor market which, away from wage growth, are showing consistent improvement. In recent days, we had seen data that showed an improving trade balance and increasing revolving credit. Then comes a day like yesterday. July retail sales increased broadly from June. Almost every slice of that data ramped higher, even department stores. You read that right. Department stores printed a month-over-month increase in sales of a full percent. Retail is dead? Not so fast there, Slick. Next comes the sudden burst of inventory-building that seems to be hitting the U.S. economy across all business lines. So important to GDP growth, the Census Bureau let us know yesterday that for June, inventories were building with some gusto across both those retailers and the wholesalers quite broadly. Even among manufacturers, inventory building had flipped from contraction to expansion. Today? Housing starts. Tomorrow? Industrial production. How important will that print be to the beleaguered transports in general? or more specifically, the railroads? Boring? Not on your life.
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Another Chance for the Banks
For now, it is the banks that benefit from William Dudley's words, as well as from a surge in surprisingly strong recent domestic macro-economic data. I have told you repeatedly, and it is no secret, that a steepening yield curve is vitally important to any potential for traditional bankers to grow profits. The spread between the yields of two-year and 10-year U.S. paper spiked yesterday, and are trading at a rough 0.924% this morning, with that 10-year itself giving up 2.283%. Huzzah? Not yet.
U.S. equity markets did not face a broad selloff yesterday, though it was clear to see that traders were thinking about it to some degree. The S&P 500 hit hard resistance at 2469 for the second time late yesterday. That was an expected, and well established, point of resistance. The algos feasted on those lined up for a break to the upside. What did do well yesterday, were the utilities (bond proxy), the staples (defensive) info tech (still on the way back from Thursday), and of course, the banks.
The banks have been boosted this week by the obvious, such as Berkshire Hathaway's (BRK.A) investment in Synchrony (SYF) and the naming of a new CEO at Wells Fargo (WFC) . That specific pop might just provide the long and wrong crowd a better out than they would have otherwise seen. There are still enough headaches to go around at Wells Fargo for this guy to stay out of the name. For the rest of the banks though, that 2/10 spread bears watching. We may see that spread approach 1.00%. It really could if the macro stays strong, and if Robert Kaplan (Dallas) comes off as hawkish on Friday, gang. Then I think that I would want to already have something invested in banking.
Currently I remain long Action Alerts PLUS charity portfolio holdings Citigroup (C) , a name that I consider undervalued, and KeyCorp (KEY) , though I reluctantly cut that long in half last month. I like JP Morgan (JPM) if we see such a move in yields, but I would drag my feet on paying these prices. I will likely initiate with 20% of what I consider a full position in that name on a pull-back to something close to 91.50.
Reuters is reporting this morning that ECB President Mario Draghi will not deliver any new policy messages at Jackson Hole on Aug. 25. There had been expectation running rampant throughout financial markets that this speech was "the next big thing" as far as monetary policy, yields across Europe, and currency valuations were concerned. I am sure that you have noticed the wild volatility seen in the EUR/USD rate this morning. That trade saw the euro buy as much as $1.1756, and as little as $1.1694, all in less than half an hour's time while you were sleeping. For those scrambling to check on the next ECB policy meeting, that event is scheduled for Sept. 7. That's a week ahead of the Bank of England, and two weeks ahead of the FOMC.
Last Train to Clarksville
The shares of Amazon (AMZN) fell slightly in premarket trade after President Donald Trump criticized the company in a tweet.
Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt - many jobs being lost!— Donald J. Trump (@realDonaldTrump) August 16, 2017
Amazon took $16 billion worth of corporate debt to market in order to fund the acquisition of Whole Foods (WFM) . It followed the lead of not only Tesla (TSLA) last week, but AT&T (T) , Microsoft (MSFT) , Verizon (VZ) , Broadcom (AVGO) , and Becton Dickenson (BDX) in tapping debt markets this year.
Borrowing costs have obviously been remarkably low for corporations, which has driven supplies in this space, but they are starting to edge higher. Demand has been just as rampant as supply. Yesterday, almost $49 billion worth of orders were entered for the $16 billion made available by AMZN. This was across maturities ranging from three years all the way out to 40 years. The federal government doesn't even push long-term debt out that far, at least not yet.
So, just what are we seeing here? Last chance for corporations to borrow cheaply? Or, is it the last chance for lenders to realize yields at these levels before they collapse once again? How about this? I don't know, but a lot of folks are taking a stand here. I'll let you know down the road.