It was looking like another week of Federal Reserve Kool Aid and crushing bears .. until Friday. On the back of bad economic news out Europe, the yield curve inverted on the 3 month vs 10 year bond – before you fall asleep to that news, it is a quite important indicator for the economy (not necessarily the stock market… yet). More on that in a bit. As you can see the action in the bond market Friday was quite severe so it will be interesting to see the move in the coming few days.
As for the Federal Reserve:
The Federal Reserve signaled no more increase in interest rates this year and just one in 2020, according to its new ‘dot plot,’ and the bank said it would end its balance-sheet runoff by September. Before a marked shift in strategy in January, the central bank had previously indicated it would raise rates twice this year and once more in 2020. The central bank also cut its gross domestic product estimate for this year to 2.1% from 2.3% and trimmed its PCE inflation forecast to 1.8% from 1.9%, leaving its core PCE estimate at 2%.
During the press conference following the decision, Chairman Jerome Powell said patience means “no need to rush to judgment” and the new policy on the balance sheet will assure a “smooth” and “predictable” process.
“The markets saw the FOMC statement as being dovish — focusing on the dot plot and its reduction of projected interest-rate increases,” said Chris Gaffney, president of world markets at TIAA Bank.
About that yield curve inversion – an excellent article from Marketwatch:
The 3-month/10-year version that is the most reliable signal of future recession, according to researchers at the San Francisco Fed. Inversions of that spread have preceded each of the past seven recessions, including the 2007-2009 contraction, according to the Cleveland Fed. They say it’s offered only two false positives — an inversion in late 1966 and a “very flat” curve in late 1998.
Recessions in the past have typically came around a year after an inversion occurred. Data from Bianco Research shows that the 3-month/10-year curve has inverted for 10 straight days six or more times in the last 50 years, with a recession following, on average, 311 days later.
For those counting at home the “average” of 10 months means a recession would hit January 2020.
Of course there is a belief system – and who is to know as we have never seen central bank intervention in all aspects of markets like we have had in the past 1o years – that “this time is different”. Granted last time they told us that it led to two of the biggest bubbles of all times – the tech and housing bubbles.
Some economists have argued that the aftermath of quantitative easing measures that saw global central banks snap up government bonds may have robbed inversions of their reliability as a predictor.
For the week, the S&P 500 fell 0.8% and the NASDAQ 0.6%.
Here is the 5 day weekly intraday chart of the S&P 500 … via Jill Mislinski.
The week ahead…
Economic news is sparse next week so one assumes a lot of attention on the bond market, continuing U.S. – China trade talks, and the Federal Reserve is sure to spend speakers out to “calm” markets after 1 down day.
Short term: The S&P 500 did break through our trendline temporarily but Friday’s reversal pushed it back below.
The Russell 2000 has been the weaker of the indexes for a while now – just like most of 2018. It is actually looking quite bad right now technically. It made a new “lower low” Friday – a low below the prior one a few weeks ago.
The NYSE McClellan Oscillator has been red for 3 weeks and the major indexes have mostly ignored it. It continues to be an interesting bifurcation.
Long term: Not awful but a bit choppy certainly.
Charts of interest / Big Movers:
Monday, Dermira (DERM) rose 84.4%, after the biotech firm reported positive results in a mid-stage trial of a treatment for moderate-to-severe atopic dermatitis.
DSW (DSW) sank 13% Tuesday after the discount footwear retailer reported fiscal 2018 earnings that fell short of analysts’ forecasts.
Thursday, Biogen (BIIB) slumped 29% after the biotechnology firm said it decided to discontinue late-stage trials of a treatment for Alzheimer’s disease. The share decline for Biogen was its largest on record.
Micron Technology (MU) soared 9.6% Thursday. The memory-chip company reported below-consensus earnings for the fiscal second quarter.
Levi Strauss (LEVI) surged 32% after opening at $22.22, significantly above its initial-public-offering price of $17.
Have a great week and we’ll see you back here Sunday!