We mentioned a few weeks in last week’s recap that came to bear this week:
(A) it is interesting how the U.S. – China trade dispute has completely disappeared from the market’s conscious
(B) Sometimes markets buy the rumor, sell the news but since MORE rate cuts are coming because the market demands them we will see what happens.
So in the former situation, Trump dropped a bit of a bombshell on the market Thursday. In the latter situation, Powell was a bit less dovish than the market wanted. He seemed to indicate this is more of a 1 off move then the beginning of a series of moves. THAT SAID, if the market sells off and DEMANDS a series of cuts, the Federal Reserve time and again has shown it will bow to pressure. Because it’s all about keeping asset values inflated. In fact, the market began doing that not 24 hrs after Powell’s testimony…. breaking! markets demand September rate cut!
Expectations for at least a quarter point cut for the September 18 Fed meeting based on trading in fed fund futures market have climbed to 98% on Friday, from 51% on Wednesday. Before Powell’s news conference, the odds stood at 67%.
Monday and Tuesday were mild down days; most of the damage was done Wednesday through Friday when Powell didn’t jump high enough for the market’s liking, and Trump came out with a new set of tariffs on China.
On the Fed:
At his press conference, Fed chair Jerome Powell added that “the Fed has moved to a somewhat more accommodative stance” as part of a “mid-cycle adjustment” as “trade tensions seem to be having a significant effect on the economy” and the “global manufacturing slowdown is a bigger factor than expected last year”. But Powell’s comment that Wednesday’s rate cut was part of a mid-cycle adjustment and not necessarily the start of a monetary easing cycle disappointed investors who had priced in further rate cuts later this year.
“I think the biggest surprise here is what is not being said: There is nothing in the statement about growth cooling here at home, and there is not a whole lot to suggest another rate cut is coming down the pike,” said Mike Loewengart, vice president of investment strategy at E*Trade.
On the tariffs:
Trump said the U.S. would impose 10% tariffs on $300 billion of Chinese goods beginning Sept. 1. In a tweet, the president said trade talks with Beijing are continuing after U.S. officials returned from negotiations in China. The 10% levies will apply to $300 billion of Chinese goods coming into the U.S. It doesn’t include $250 billion of goods already subject to tariffs, the president said.
“Unlike in previous tariff rounds, the goods that will be affected by the 10% tariff mainly include finished goods, meaning that the impact on U.S. consumers will be more direct than it has been thus far,” wrote Cailin Birch, global economist at The Economist Intelligence Unit.
Treasuries took a quite serious swoon on the tariff news.
Emerging markets also swooned:
In economic news ISM Manufacturing fell to 51.2, the lowest reading since August 2016. This is now getting perilously close to 50 which is the marker between expansion and contraction.
The U.S. economy created 164,000 jobs in July. The unemployment rate held steady at 3.7%, and average hourly earnings rose 3.2% year-over-year.
For the week, the S&P 500 fell 3.1% and the NASDAQ 3.9%.
Here is the 5 day weekly intraday chart of the S&P 500 … via Jill Mislinski.
An interesting story here on the massive level of stock buybacks happening in corporate America.
The week ahead..
After an entire 12 hours of worrying about whether the Fed would cut rates again, markets have now priced in a full cut for September. So the Fed must act or risk a meltdown. Now it will be interesting to see if “bad news is bad news” or if “bad news is good news” in the coming weeks. After ignoring trade negotiations on the back of the Fed easing cycle, that story should come back to front and center and if past is prologue leaks of “magnificent progress” in talks should be hitting in a week or two.
Monday will bring the ISM Services data which has been far stronger than Manufacturing. We are getting into the latter end of earnings season as well.
Short term: both major indexes fell back to their 50 day moving averages. The S&P 500 just briefly breached its breakout level while the NASDAQ fell through it more substantially.
The Russell 2000 remains stalled and is now near the lower end of its months long range after pushing towards the top end minutes before Powell spoke.
The NYSE McClellan Oscillator is firmly in the red and has been mostly in a cautionary state for the past month.
Long term: a pullback here on the weekly chart but big picture it’s been quite the recovery from late 2018 lows.
Charts of interest / Big Movers:
Beyond Meat (BYND) slumped 12.3% Tuesday after reporting late Monday that sales nearly quadrupled from a year ago, but its second quarter loss grew, and it would sell more shares to raise capital.
Under Armour (UA) took a beating in Tuesday trading as the athletic gear company continues to struggle in North America and forecasts additional hurdles ahead.
Apple (AAPL) shares traded at the highest level in nine months Wednesday after the iPhone maker late Tuesday reported better-than-expected second-quarter revenue growth. The slowdown in iPhone unit sales in the past couple of years has restrained Apple’s overall growth since its fiscal year ended Sept. 30, 2015, but its large share buyback program has helped to maintain EPS growth and its shares have nearly doubled in the past three years.
Stocks with significant exposure to China such as Nike (NKE) and Caterpillar (CAT) took quite the tumble late in the week.
Have a great week and we’ll see you back here Sunday!