What If They Had A Recession And Nobody Came?

There are two main constituencies in the U.S. that are hoping for a recession. The financial markets, both stocks, and bonds seem to have a vested financial interest in there being one.

For the bond market, which has been the biggest rooter for a recession, a weak economy means lower loan demand and lower interest rates, which means higher bond prices. For the stock market, a weaker economy, although not necessarily a full-blown recession, promises more accommodation from the Federal Reserve and, therefore, lower interest rates, which generally translates into higher corporate earnings and, therefore, higher stock prices.

The Democrat Party and its allies in the press naturally want a recession simply because it makes it less likely that President Trump will be re-elected. So they are rooting strongly for a recession, although they can’t actually come out and say so.

The recession lobby got some fresh ammunition last week when the Institute for Supply Management’s purchasing managers’ indexes for September came out. They were some of the worst in years, which ignited a rally in the bond market.

On Tuesday, the ISM manufacturing index slipped further into contraction territory, dropping more than a point from 49.1 in August to 47.8, its lowest level since June 2009, during the Great Recession (there’s that word again).

Unfortunately for the pro-recession crowd, a lot of the rest of the economic numbers aren't telling the same story. The ISM’s index for the services sector – which covers about three-quarters of economic activity – also came in lower than expected, dropping nearly four points from 56.4 to 52.6, its slowest pace in three years. But it remained well in expansion mode (i.e., over 50). That part of the story got little attention. Continue reading "What If They Had A Recession And Nobody Came?"

Pre-Fed Precious Metals Update

We review these metals as the media schleps all over itself trying to tell people why the Fed will cut 1/4, will cut 1/2, should not cut at all and/or why the president of these United States of America is on Twitter haranguing the Fed to be as disreputable as Mario Draghi and China’s central planners because they know how to play the game. It’s all a game after all, isn’t it Trump? You old currency warrior, you.

Copper daily is nesting on the SMA 50 but locked below resistance and the SMA 200. Still in bounce mode but very unspectacular.

copper

Copper weekly still looks pretty gross. It’s above critical support but locked below a ton of resistance. The 2016-2019 pattern also looks like a freak. I refuse to like industrial metals (or cyclical commodities in general) until I get some technical reason to like them. Continue reading "Pre-Fed Precious Metals Update"

One Lump Or Two?

With the financial markets already primed for a 25-basis-point cut at next week’s Federal Reserve monetary policy meeting, the talk has now shifted to the possibility that the Fed may go even further and reduce its benchmark federal funds rate by 50 basis points instead.

That speculation was fueled by New York Fed President John Williams, who exhorted an audience of the Central Bank Research Association in New York last week to “take swift action when faced with adverse economic conditions” and “keep interest rates lower for longer” when reducing rates.

“Don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might,” he added, which may have left some listeners wondering what year this was – 2008, when the Great Recession was just beginning, or 2019 when the economy is still growing. Either way, listeners on Wall Street were happy to hear it and immediately pushed stock prices higher.

The New York Fed subsequently walked back Williams’s comments, saying that he didn’t mean to suggest that the Fed was about to double-down on a rate increase next week, downplaying his comments as an “academic speech” and “not about potential policy actions at the upcoming FOMC meeting.”

But Fed Vice Chairman Richard Clarida swiftly echoed Williams’ comments, telling the Fox Business Network, “You don’t wait until the data turns decisively if you can afford to. If you need to [cut rates], you don’t need to wait until things get so bad to have a dramatic series of rate cuts.”

The only difference is that Williams described the economy as “pretty strong” – begging the question why the Fed feels it needs to lower rates at all, whether by 25 or 50 basis points – while Clarida implied that the economy is ready to hurtle over the cliff unless the Fed rides to the rescue.

Along comes Boston Fed president Eric Rosengren with a different take. Continue reading "One Lump Or Two?"

Financials: The Delicate Balance of Rates and Yield Curve

The financial cohort is in a difficult space as the broader economic backdrop continues to dictate whether these stocks can appreciate higher. A delicate balance between interest rates, Federal Reserve commentary, yield curve inversion, trade war, and concerns over a potential recession in late 2019 or early 2020 must be attained. A disruption in this complex web can lead to the financials breaking down as witnessed in Q4 2018 and in May of 2019. In Q4 2018 rates were increased by the Federal Reserve and sent the financials in a downward tailspin. In May 2019, a trifecta of a yield curve inversion, trade war concerns, and increased chatter about a potential recession on the horizon again sent the cohort lower. The broader market appreciated markedly in June, and the bank stocks participated in the rally. Coupled with renewed record share buybacks and increased dividend payouts stemming from successful stress tests, banks elevated higher on the news. Now, the market is anticipating that the Federal Reserve will cut rates at its next meeting, which may serve as another catalyst to propel some bank stocks to new 52-week highs.

The Q4 2018 Federal Reserve and Jerome Powell

The market-wide sell-off in the fourth quarter of 2018 was largely induced by the Federal Reserve and its alleged commitment to sequential interest rate increases into 2019. This was largely viewed as reckless and misguided while turning a blind eye to broader economic data-driven decision making about further interest rate hikes. The stock indices responded to the sequential interest rate hike stance with overwhelming negative sentiment, logging double-digit declines across the broader markets. Many market observers were questioning the Federal Reserve’s aggressive stance as companies issued weakness in ancillary economic metrics (slowing global growth, strong U.S. dollar, trade war, government shutdown, weak housing numbers, retail weakness, auto sluggishness, and oil decline) as an indication that cracks in the economic cycle were materializing. The strong labor market and record low unemployment served as a basis to rationalize increasing rates to tame inflation; however, these aforementioned economic headwinds appeared to cause the Federal Reserve to pivot in its aggressive stance. As Chairman Jerome Powell began to issue a softer stance on future interest rate hikes, January saw very healthy stock market gains after being decimated for months prior. On January 30th, Jerome Powell issued language that the markets were craving to levitate higher as he left interest rates unchanged and exercised caution and patience as a path forward. Using data-driven decision making as a path forward was cheered by market participants as the broader indices popped for healthy gains on top of the already robust gains throughout January. Continue reading "Financials: The Delicate Balance of Rates and Yield Curve"

Promises, Promises

Pity poor Jerome Powell. He just can’t seem to stay out of his own way.

For the past several weeks the Federal Reserve chair has been promising – ok, maybe not promising, but strongly “indicating” – that it’s only a matter of time that the Fed will cut interest rates. He’s certainly been grooming the financial markets for such a move, and the markets have duly responded, as the major U.S. equity indexes all jumped more than 7% last month while bond yields plunged.

Now comes last Friday’s jobs report that came in much stronger than most people expected and far stronger than the previous month’s totals. The Labor Department said the economy added 224,000 new jobs in June, well above not only the consensus Street forecast of 165,000 but also the most bullish individual estimate of 205,000. It was also far stronger than May’s total of 72,000, which was actually revised downward by 3,000 from the original figure.

Following May’s underwhelming report, most people seemed to believe that the jobs boom had finally played itself out, and it would be all downhill from here, with a recession looming in the not-too-distant future. And then what do you know, the June report comes out and takes everyone by surprise, not least of all Jay Powell himself. Continue reading "Promises, Promises"