Sell In May? Wait For The Powell Put

After turning in one of its best January-April performances in more than 20 years, the stock market has suddenly run out of gas in May. We’re nowhere near correction territory – the S&P 500 is down about 2% so far this month after climbing more than 18% in the first four months of the year, and up 22% since the Christmas Eve bottom. Yet the financial press has been filled with “sell in May and go away” stories, citing the Wall Street urban legend – or historical trend, take your pick – that all the money that’s going to be made this year has already been made, so you may as well cash in your winnings and sit out the rest of the year.

The major impetus behind the dip – which doesn’t even meet the definition of a “dip” yet since few people seem to be buying on it – is President Trump’s announcement that he has upped the ante on the trade war with China, raising worries that talks between the two countries will collapse. The recent spate of high-profile IPOs from Lyft, Uber, Pinterest and other companies is also signaling that the stock market may have peaked.

Which raises the question: Is the Powell Put going to come to the stock market’s rescue again in the near future? How deep will a drop in the stock market – assuming it keeps dropping – have to get before the Federal Reserve intervenes and cuts the federal funds rate? Continue reading "Sell In May? Wait For The Powell Put"

Sweet Surrender

Janet Yellen had a pretty easy job when she was the Federal Reserve chair. By keeping interest rates at or near zero for years on end, she never heard any criticism from the president, government officials or the financial markets. Since he became Fed chair a little over a year ago, Jerome Powell has gotten nothing but flack, from President Trump – who was at it again last week – to a whole swarm of people on Wall Street complaining that the Fed was ruining their returns.

Powell got the message several months ago, and last week he handed in his formal surrender. Not only did the Fed leave interest rates alone at its monetary policy meeting, but it indicated that there would likely be no more rate hikes the rest of this year, and maybe next year, too. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Powell said.

The Fed also called a halt to the runoff in its still humungous Treasury securities portfolio. Beginning in May, the Fed will slow to $15 billion – from the current $30 billion -- the monthly redemptions of its Treasury holdings, with the runoff to end in October, meaning its balance sheet will start growing again.

So now Powell and his Fed mates can sit back blissfully and listen to the silence, at least for now. Continue reading "Sweet Surrender"

Blowin' In The Wind

Federal Reserve Chair Jerome Powell last week held sacred the Fed’s “precious” independence, but he apparently forgot how quickly and easily it’s been bullied into altering its monetary policy by both politicians and influential financial markets people.

Until just a couple of months ago, the Fed was determined to “normalize” interest rates and its enormous balance sheet. But after a relative – emphasis on that word – weak patch for the economy and howls of pain from investors during last year’s correction, the Powell Fed was lighting quick to reverse course and put a halt to more rate hikes and portfolio runoff until further notice.

Not surprisingly, the financial press hasn’t given President Trump any credit for this (if credit is the right word in this instance), even though he was clearly the first and loudest basher of tightening Fed policy. Wall Street then jumped on the bandwagon, and voila, we have a new “patient” Fed and an easier monetary policy – and the best January for stocks since the 1980s.
Powell and other members of the Fed have tried to justify their abrupt about-face by noting recent weak – again, relatively speaking – economic data. But January’s robust nonfarm payrolls report – nearly double the consensus forecast – calls that into serious question. Continue reading "Blowin' In The Wind"

Dimon Says: Get ready for 5% 10-year yield

If you don’t believe me, believe Jamie Dimon.

“I think rates should be 4% today,” the JPMorgan Chase CEO said this week, referring to the yield on the benchmark 10-year Treasury note. And if that wasn’t strong enough, he added, “you better be prepared to deal with rates 5% or higher — it's a higher probability than most people think.”

The question shouldn’t be, “Is he right?” Instead, it should be: “Why aren’t rates that high already?”

The 10-year yield ended last week at 2.95%, about unchanged from the previous week, although it did cross over into 3.0% territory for about a day before falling back. It started this week at 2.93% -- after Dimon made his comments.

Just about every Federal Reserve comment and economic and supply-and-demand figure screams that the yield on the 10-year should be at least 100 basis points higher than it is today. Yet the yield remains stubbornly at or below 3%. Continue reading "Dimon Says: Get ready for 5% 10-year yield"

Inflation - Getting Back To Normal

George Yacik - INO.com Contributor - Fed & Interest Rates -
 inflation


So now, suddenly, out of nowhere, inflation has reared its ugly head, and the financial markets are starting to believe it.

On Wednesday the Labor Department reported that the consumer price index rose a higher than expected 0.5% in January, 2.1% compared to the year-earlier period. The all-important core rate, which excludes food and energy prices, rose 0.3% for the month, 1.8% versus a year ago. While not exactly hitting the Federal Reserve’s revered 2.0% annual inflation target, it was apparently close enough to create more jitters in the bond market, with the yield on the U.S. Treasury’s benchmark 10-year note immediately climbing seven basis points to 2.91%, its highest level in more than four years.

The very next day, Labor reported that the core producer price index rose 0.4% for the month and 2.2% year-on-year, which pushed up the yield on the 10-year another basis point, to 2.92%.

I’m not exactly sure why this recent surge in inflation should come as such a big surprise to anyone, but it surely has, witness the tremendous amount of volatility in the financial markets in just the past two weeks. The tipping point seems to have been the release of the January jobs report, the highlight of which wasn’t the change in nonfarm payrolls and the unemployment rate, which they usually are, but the 0.3% (2.9% annualized) growth in wages, which was the strongest year-over-year gain since June 2009.

That seemed to finally catch everyone’s attention that yes, contrary to what the Fed has been telling us for the past four years, inflation really does exist. Now we have more verification. And it’s probably only going to exacerbate.

And who do we have to thank for this new-found inflation? Continue reading "Inflation - Getting Back To Normal"