Thursday, March 21, 2019, 12:31 PM, EST
- Stocks continue to react to yesterday's Fed announcement on interest rates
- Initial Jobless Claims fell slightly to 221,000 vs. 225,000 est.
- Continuing Claims were 1.75 million vs. 1.77 million est.
- Philly Fed rebounded to +13.7 from -4.1 last month and 4.8 est.
Today, stocks started lower by over 100 Dow points this morning but clawed back to positive territory within the first half-hour and added to gains later, now up near 180 points. We are still feeling the reverberations of the Fed’s statements yesterday. The dovish news of no rate hikes this year and next caused stocks to immediately pop about 15 S&P 500 points (or just under 150 Dow points) in the afternoon.
The Fed validated the market’s thinking that there would be no rate increases in 2019. Prior to the meeting Fed dot plots and economist surveys indicated the possibility for hikes so it was possible the market had it wrong. A hawkish surprise could have been bad for stocks. The Fed also aided shares by stating there would only be one increase over the next two years and that the balance sheet wind-down (a form of tightening) would end by September.
So why did shares give up all those gains by the 4 p.m. close? Because the Fed also lowered its GDP forecast to 2.1% from 2.3% and said that inflation would run at a below 2% target rate of 1.8% this year and 1.9% next year. So stocks seem to be reacting to a softer growth outlook, with some trade talk worries sprinkled in. While the labor market remains strong (see jobless claims below), household and business spending has slowed according to the Fed. Inflation has also declined largely as a result of lower energy prices. Validating the lower growth/low inflation thesis is the continued slide in 10-year treasury note yield, which fell sharply from 2.59% just prior to the meeting to 2.51% today. For more on yields, see Brian's "Technical Take" below.
This morning, stocks retraced early losses seemingly on the recognition that “it’s not that bad” and that low rates through 2020 are pretty good for stocks. The risk of a hike behind us is pretty bullish. As one would expect from the low/flat rate environment, Financials are having a tough time of it this morning, currently the worst performing sector, though off earlier lows, while Technology stocks whose valuations are helped by low rates are leading by a good margin (see Sector Performance table below). The spread differential between 2-year and 10-year Treasuries is about 11 basis points - about as flat as the St. John’s men’s college basketball team was last night against Arizona State (ugh). In economic news the data is not that bad. Philadelphia Fed Business Outlook registered a positive 13.7 reading vs. last month’s -4.1% and the expectation for only 4.8%. Analysts caution however that a jump in shipments in the region came from orders placed in 2018 and that slowing orders and inventory build could hurt shipments going forward. The labor market remains strong. Initial Jobless claims were basically in-line at 221,000 vs. 225,000 estimated with initial jobless claims also slightly lower at 1.75 million vs. the estimate of 1.77 million.
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Brian’s Technical Take
The Fed put is alive and kickin’ and yesterday’s dovish statement helped that tide lift all boats. Not only did local and global equities see an initial spike higher, but so did safe haven treasuries which drove the middle of the curve (5’s, 7’s, and 10’s) to fresh 52-week lows. Yes some of the stock indices gave some back to finish modestly lower, but that’s likely a combination of the Fed downgrading its economic outlook and as well as some “sell the news” profit taking.
Equities have already come a long this quarter. Just last quarter Chairman Powell told us rates are a long ways from neutral, and QT was on autopilot. Now rates are staying put (excuse the pun), and QT is projected to end in September. Yes financial and economic conditions changed to warrant the turnaround, however the Fed appears to have been slow to respond and may have gone too far with the tightening.
That is what we argued in the days leading into the December hike when markets were clearly is disarray, yet the Fed continued with the hike because it had already signaled such action. With eight hikes over 24 months, the fed funds rate now resides in the 2.25% - 2.50% range and the belly of the curve has gone deeper into negative territory. The short end of the curve (1-Month, 3M, 6M, 12-M) is yielding 2.46% - 2.49% which is more than what investors are getting paid to hold 2’s, 3’s, 5’s, and 7yr paper yielding between 2.40% and 2.43%. A week before the December meeting, there was no inversion. The below chart shows the current yield curve (solid yellow line), vs. how it looked the week before the December meeting (orange, dotted line). Time will tell whether or not the current inversion is a signal of economic recession or something else. At the moment “don’t fight the Fed” could prevail as the overriding theme.
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Nasdaq's Market Intelligence Desk (MID) Team includes:
Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.