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Jerome Powell expressing himself after being named President of the Federal Reserve by President Donald Trump (November 3, 2017)
White House
The Fed's rate-setting committee met on Tuesday and Wednesday, March 19th and 20th.
What the market has seen and heard
According to their official statement and their press conference, the stock market only saw and heard what he wanted, at least in the beginning, and the stock markets rose on Thursday 21 March.st (Dow Jones +217):
- No rate hike in 2019, and perhaps only one in 2020 (and this would happen because the current "turning patch" has been exceeded!);
- End the Fed's downsizing, thereby preserving the banks' high reserve balances and implying that interest rates can remain low.
What the market ignored
Here is what the Fed actually said that the stock market had initially ignored (this is from the introductory paragraph of the FOMC press release):
"… Economic activity has slowed down … wage employment has changed little … recent indicators point to slower growth in household spending and fixed investment by businesses."
This statement speaks volumes. Markets should be concerned that the Fed has recognized a significant slowdown in the United States, which has reduced its GDP growth outlook to 2.1% from 2.3% in 2019 and 1.9% by 2.0% in 2020. The Fed has also reduced its inflation forecast accordingly. .
At the press conference, President Powell said that he did not see a recession. Ask yourself what would be the reaction of the market if he said he had one? From the point of view of market movement, it is not feasible for a Fed president to predict anything other than economic stability. If they acted otherwise, they would shirk the obligation to keep unemployment and inflation low.
The Fed also announced that it would slow down its balance sheet cycle, which would rise from $ 30 billion a month until April to $ 15 billion a month until September, and then to $ 0. . It should be noted that the continuation of tightening continues, albeit at a lower rate, from May to September, when the tightening ends. (Historical Factoid: In the three gradual landings (of the 13 rate-hike regimes) the Fed put in place after the Second World War, they had already relaxed considerably at this stage of the cycle.)
Bonds know better
The bond market, meanwhile, concluded that the weakness of the Fed was not due to the lack of inflation, it is a symptom. The bond market focused on the Fed's growth concerns and their consequences. As a result, the yield on the 10-year Treasury Notes fell from 2.60% to 2.40% (at the time of writing this letter), reversing now against the upper limit of 2.50% federal funds and also reversing the 3-month T-bill. Such reversals are often the prelude to impending recessions, and the financial press has focused on this factoid.
At the same time, the futures market is now forecasting a reduction in rates by almost 60% by 31/12/19 (and of course, a reduction in rates should be a sign of real concern about short-term economic growth). Markets are also now showing the probabilities of a 0% interest rate rise in 2019. A month ago, the probabilities of rate cuts were 18% and 23% just before the Fed meeting.
Thus, the bond market is clearly in line with the idea that growth will remain weak and that the short-term recession is an obvious possibility.
The FedEx / Nike Pulse
A recent significant evolution of the market has been the unexpected release of FedEx results. The company is often seen as reflecting the "pulse" of the economy, especially the consumer, and is considered by some to be the "canary of the coal mine". The fact that she missed both profit and income is revealing. And they further lowered their forecasts (after publishing it last December). Their press release indicated that the results were due to "slowing international economic conditions and weaker growth in world trade". They said nothing about the fact that the economic "retarder" was "temporary". In fact, a lowering of the forecasts indicates the opposite. Nike also disappointed lower-than-expected North American sales.
In addition, the latest data from Europe is raising concerns that the "soft patch" is simply not being adopted as planned. According to IHS, German manufacturing output in March was at its lowest in six years! And the latest readings from the Dallas and Chicago Feds show that business in their regions has continued to slow down.
The economic landscape
On Friday morning (22/03/19), stock markets seemed to have realized that the Fed was worried about its future growth and that the Dow had closed down 460 points.
The market now recognizes that economic growth for 2019 and likely for 2020 will be less than 2% and could be much lower due to:
- tariffs that increase the consumer prices of these products are "taxed";
- the discouraging effects of fiscal stimulus measures (tax cuts);
- labor shortages resulting in production cuts (according to the Philly Fed survey);
- excessive student debt that weighs down the finances of younger generations;
- the lagged impact of previous Fed rate hikes and the fact that any future rate reduction will take several quarters to have a significant impact.
Conclusion
PE ratios are relatively high relative to their historical average and markets will remain volatile when earnings disappoint (FedEx, Nike) or macro data point to persistent weakness. The stock market relies heavily on Powell's Put. Perhaps a big downward volatility will put the "Put" to the test, ie if Powell & amp; Cie will effectively relax its policy by reducing rates to protect the investor in equities. Only time will tell. My bet is that, given sufficient downward pressure on prices, they will do so. After all, the data indicates that recession risks are significant and increasing.
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Jerome Powell expressing himself after being named President of the Federal Reserve by President Donald Trump (November 3, 2017)
White House
The Fed's rate-setting committee met on Tuesday and Wednesday, March 19th and 20th.
What the market has seen and heard
According to their official statement and their press conference, the stock market only saw and heard what he wanted, at least in the beginning, and the stock markets rose on Thursday 21 March.st (Dow Jones +217):
- No rate hike in 2019, and perhaps only one in 2020 (and this would happen because the current "turning patch" has been exceeded!);
- End the Fed's downsizing, thereby preserving the banks' high reserve balances and implying that interest rates can remain low.
What the market ignored
Here is what the Fed actually said that the stock market had initially ignored (this is from the introductory paragraph of the FOMC press release):
"… Economic activity has slowed down … wage employment has changed little … recent indicators point to slower growth in household spending and fixed investment by businesses."
This statement speaks volumes. Markets should be concerned that the Fed has recognized a significant slowdown in the United States, which has reduced its GDP growth outlook to 2.1% from 2.3% in 2019 and 1.9% by 2.0% in 2020. The Fed has also reduced its inflation forecast accordingly. .
At the press conference, President Powell said that he did not see a recession. Ask yourself what would be the reaction of the market if he said he had one? From the point of view of market movement, it is not feasible for a Fed president to predict anything other than economic stability. If they acted otherwise, they would shirk the obligation to keep unemployment and inflation low.
The Fed also announced that it would slow down its balance sheet cycle, which would rise from $ 30 billion a month until April to $ 15 billion a month until September, and then to $ 0. . It should be noted that the continuation of tightening continues, albeit at a lower rate, from May to September, when the tightening ends. (Historical Factoid: In the three gradual landings (of the 13 rate-hike regimes) the Fed put in place after the Second World War, they had already relaxed considerably at this stage of the cycle.)
Bonds know better
The bond market, meanwhile, concluded that the weakness of the Fed was not due to the lack of inflation, it is a symptom. The bond market focused on the Fed's growth concerns and their consequences. As a result, the yield on the 10-year Treasury Notes fell from 2.60% to 2.40% (at the time of writing this letter), reversing now against the upper limit of 2.50% federal funds and also reversing the 3-month T-bill. Such reversals are often the prelude to impending recessions, and the financial press has focused on this factoid.
At the same time, the futures market is now forecasting a reduction in rates by almost 60% by 31/12/19 (and of course, a reduction in rates should be a sign of real concern about short-term economic growth). Markets are also now showing the probabilities of a 0% interest rate rise in 2019. A month ago, the probabilities of rate cuts were 18% and 23% just before the Fed meeting.
Thus, the bond market is clearly in line with the idea that growth will remain weak and that the short-term recession is an obvious possibility.
The FedEx / Nike Pulse
A recent significant evolution of the market has been the unexpected release of FedEx results. The company is often seen as reflecting the "pulse" of the economy, especially the consumer, and is considered by some to be the "canary of the coal mine". The fact that she missed both profit and income is revealing. And they further lowered their forecasts (after publishing it last December). Their press release indicated that the results were due to "slowing international economic conditions and weaker growth in world trade". They said nothing about the fact that the economic "retarder" was "temporary". In fact, a lowering of the forecasts indicates the opposite. Nike also disappointed lower-than-expected North American sales.
In addition, the latest data from Europe is raising concerns that the "soft patch" is simply not being adopted as planned. According to IHS, German manufacturing output in March was at its lowest in six years! And the latest readings from the Dallas and Chicago Feds show that business in their regions has continued to slow down.
The economic landscape
On Friday morning (22/03/19), stock markets seemed to have realized that the Fed was worried about its future growth and that the Dow had closed down 460 points.
The market now recognizes that economic growth for 2019 and likely for 2020 will be less than 2% and could be much lower due to:
- tariffs that increase the consumer prices of these products are "taxed";
- the discouraging effects of fiscal stimulus measures (tax cuts);
- labor shortages resulting in production cuts (according to the Philly Fed survey);
- excessive student debt that weighs down the finances of younger generations;
- the lagged impact of previous Fed rate hikes and the fact that any future rate reduction will take several quarters to have a significant impact.
Conclusion
PE ratios are relatively high relative to their historical average and markets will remain volatile when earnings disappoint (FedEx, Nike) or macro data point to persistent weakness. The stock market has relied heavily on Powell's "Put". Perhaps a great downward volatility will put it to the test, that is, if Powell & Co. will actually soften its policy by cutting rates to protect the company. investor in shares. Only time will tell. My bet is that, given sufficient downward pressure on prices, they will do so. After all, the data indicates that recession risks are significant and increasing.
