For all the attention President Trump gets for his public dissatisfaction with Jay Powell and the Federal Reserve, nothing can beat Wall Street meltdowns and hissy fits when monetary policy isn’t spoon-fed in chunky bites with promises of more to come. Lower rates and other actions are considered medicine for the babies on Wall Street – it’s more like chocolate cake.
So, Jay Powell cut rates as expected and announced an end to quantitative tightening (QT) this month, instead of waiting until October.
However, the statement didn’t have a sense of urgency or any fire about additional rate cuts. The only fire came during the question and answer period, where Jay Powell took credit for the economy and dissed the trade war more than I can remember.
Powell has made no secret that he thinks the Fed saved the day during the Obama presidency. On more than one occasion yesterday, he sounded as if credit was the lion’s share of the current leg of the expansion and should go to his work on monetary policy.
It began with the very first question when asked if one 25 basis point (bps) rate cut would be enough. Powell stated that this has been more than one rate cut, and it has been an emotional journey that coaxed the best out of businesses, consumers, and the stock market.
By managing expectations, the Fed put everyone under a spell. It came into the year, hinting at “some rate increases,” shifting into “patience setting,” and finally carrying out that rate cut we have all been clamoring for.
According to Powell, over the course of the year, hinting at more accommodation had the economy perform just about as expected. Then he modestly said, “I wouldn’t take the credit for all that, but it’s clear it worked and has kept the economy on track.”
Numerous times during the press conference, Powell took credit for the economy in a way that seemed to suggest he should get more credit than President Trump and his pro-growth fiscal policies. On that note, the dissing of Trump was just the beginning.
Coming into the Federal Open Market Committee (FOMC) gathering, Fed officials persistently harped about low inflation. While Powell acknowledged it was one reason for action, he spent a lot of time on the uncertainty of the trade war. Unlike prior FOMC meetings and press conferences, he sounded the alarm on the toll it’s taking on parts of the economy, especially manufacturing.
I know you are thinking that until a couple of months ago, the Manufacturing Renaissance was one of the hallmarks of this administration. I don’t think Powell was the only critic waiting for that to fade to pounce, but his true globalist leanings were revealed.
Perhaps it felt good to push back on Trump by taking credit for the economy and dissing the trade fight, but Powell got off his message enough for the Pavlovian spell not to work with Wall Street. Those folks don’t tweet…they sell and sell a lot. While he was explaining his magic act as being more than a simple rate cut, Powell dropped a phrase that spooked the heck out of those looking for infinitely cheap money.
Say what? Yes, a midcycle adjustment, coupled with his answer for running out of arrows (just hike rates and creating more) lingered over the market into the close and created a sea of red, while spiking the dollar to a 26-month high. I’ve always said ignore the initial market response after the conclusion of the FOMC gatherings and focus on the following sessions.
Powell dropped enough hints that there is at least one more rate cut. However, he didn’t make it as obvious, as he contends that he and his colleagues are the architects of this booming economy, and he hates the trade war.
The Chicago Purchasing Managers’ Index (PMI) was overlooked yesterday, despite the fact it was an unmitigated disaster. Four out of five components moved into contraction, including employment for the first time since October 2017, hitting its lowest level since October 2009. Powell mentioned trade and manufacturing. He also hinted we could be in a global business cycle related to a weakness in manufacturing and investment. And in that case, he might want to charm…I mean, calm the markets.
Another worrisome situation was the third monthly decline in small business employment at the micro-level (1 to 19 employees). I get some of this is about the inability to compete for talent demanding higher wages, but there must be more, and it should get the Fed’s attention.
We didn’t make any changes to the model portfolio yesterday. Today, we might make some command decisions, but I have to say to be careful not to misread Wall Street’s whining for anything other than whining.
Nowhere to Run…Nowhere to Hide
Yesterday was one of those sessions, where you feel good having taken profits on a bunch of positions and having cash because there was no place to run or hide. Nonetheless, anyone in the stock market for longer than a week understands there will be bouts of volatility and occasionally emotional dips like yesterday.
After the close, a few names surged on earnings news, which is a reminder when the Street gets off low rate fixations, fundamentals of individual names will matter more as they do over time anyway.
S&P 500 Index
Communication Services (XLC)
Consumer Discretionary (XLY)
Consumer Staples (XLP)
Health Care (XLV)
Real Estate (XLRE)
The major indices are in the green this morning, however off the highs from the pre-market. Initial jobless claims for the week ending July 27 rose 8,000 to 215,000 but are still at very low levels and indicative of a tight labor market. A better gauge, the 4-week moving average, dropped 1,750 to 211,500. July is historically known for its swings in some states, such as Michigan where auto manufacturers shut down plants for retooling to new models, and workers are laid off.
Let’s see how the day after the FOMC meeting goes.