Morning Briefing

The Federal Reserve continues to believe in Goldilocks

The Federal Reserve continues to believe in Goldilocks

Yes, the Federal Reserve got a lot more pessimistic on economic growth, inflation, and interest rates in the Dot Plot projections released on Wednesday, September 21. For instance, the Fed’s median projection for real growth in the U.S. economy for 2022 dropped to 0.2% the year to year in the fourth quarter of 2022 from 1.7% in the June projections. And for 2023 the Fed’s projections dropped to an annualized rate of 1.2% in the fourth quarter from an earlier projection of 1.7%. But the Fed is still a firm believer in fairy tales. That of Goldilocks, specifically, where the economy and Fed policy turn out to be “just right.”

Signs of the Next Bear Market Rally Story Yesterday–Will It Take Root?

Signs of the Next Bear Market Rally Story Yesterday–Will It Take Root?

One of the oddest things about yesterday’s reaction to news from the Federal Reserve of a 75 basis point increase in interest rates was that the market initially rallied. Yesterday, September 21, from 3801 at 10:25 a.m.New York time, the Standard & Poor’s 500 moved up to 3895 at 2:40 p.m. right after the Fed released its news. And, then, markets began a retreat with the S&P 500 closing down 1.71% on the day. It’s almost like the markets constructed one story–relatively positive–in the immediate aftermath of the news. And, then, upon further consideration, built a different much less positive story to the close of the day. Make that “exactly” instead of “almost like.”

No surprise–Putin raises his bet in Ukraine

No surprise–Putin raises his bet in Ukraine

Faced with the alternative of admitting that recent Ukrainian counter-attacks have sent Russia’s military reeling, Russian President Vladimir Putin has decided to up his game in Ukraine. So far, today, the markets remain focused on the meeting of the Federal Reserve and the U.S. central bank’s decision on interest rates. But I’d try to spare a few brain cells for the likely effects on commodities such as wheat and natural gas from these signs of escalation. Europea natural gas inventories are now at 86% full, just above the 5-year average. That suggests that gas prices will move higher but that this winter won’t see widespread shortages and prices. I think it’s likely to be another story for prices in 2023 when European countries need to scramble to refill these reserves. I own U.S.Natural Gas Fund ETF (UNG) and the Teucrium Corn Fund ETF (CORN) and Teucrium Wheat Fund ETF (WEAT) in my online portfolios. I own all three in my personal portfolios.

Waiting for Jerome

Waiting for Jerome

You’d think that if everyone (maybe even Samuel Beckett) is expecting the Fed to raise interest rates 75 basis points at tomorrow’s meeting of the Open Market Committee, financial markets would have been able to move on today to other “issues.” (Like Ford’s huge negative earnings pre-announcement or the global supply crunch for coffee. The CME FedWatch Tool today puts the odds of a 75 basis point increase at 84%. The other 16% goes to a 100 basis point increase. Nobody is expecting just 50 tomorrow. But no. Stocks and bonds are lower but it feels like markets are just marking time.

FedEx sets off market retreat with very negative guidance

FedEx sets off market retreat with very negative guidance

Yesterday, September 15 FedEx (FDX) preannounced a huge miss for the upcoming quarter (due to be reported on September 22) and withdrew its guidance for the full year. Researchers at Deutsche Bank said that it’s the worst report they’ve seen in two decades. “FedEx preannounced last night the weakest set of results we’ve seen relative to expectations in our ~20 years of analyzing companies,” the company’s analysts wrote in a note to clients.

Biden announces release of $900 million in funding for electric vehicle charging build out

Biden announces release of $900 million in funding for electric vehicle charging build out

Wednesday, September 14, President Joe Biden used a visit to the Detroit Auto Show to announce the release of the first $900 million in funding for the buildout of a national network of charging stations for electric vehicles. The funding, part of $7.5 billion in the Infrastructure bill to build out a network of 500,000 charging stations, would go to 35 stations to build charging networks along 53,000 miles of highways. Today, the sector is moving up rapidly with ChargePoint up 8.60% and EVgo up 12.16% as of 2:30 p.m. New York time.

Yesterday there was a whiff of panic over the CPI inflation disappointment; today not so much with stocks moving slightly higher

Yesterday there was a whiff of panic over the CPI inflation disappointment; today not so much with stocks moving slightly higher

Investors and traders have decided not to panic today. Which certainly wasn’t the case yesterday. I’ll leave it to you to decide if a 5.54% drop in the NASDAQ 100 is a measured reaction to inflation running 20 basis points hotter than projected. (Amazon (AMZN) fell 3.06%, Apple (AAPL) was down 5.87%, Applied Materials (AMAT) was lower by 6.14%, and Nvidia (NVDA) plunged 9.47%.) But I sure caught a whiff of panic in Wall Street calls for the Federal Reserve to raise interest rates by a full 1.00%–and not the widely anticipated–0.75% at the September 21 meeting of the Open Market Committee.

The key question for a Bear market rally: How long will it take investors to move on from today’s inflation disappointment?

The key question for a Bear market rally: How long will it take investors to move on from today’s inflation disappointment?

Stocks plunged today as the Consumer Price Index inflation measure came in above economist expectations and market hopes.

Headline CPI inflation ran at an 8.3% annual rate in August. That was down from the 8.5% annual rate in July and the 9.1% annual rate in June. But above the 8.1% annual rate forecast by economists.

On the news, stocks fell steeply with the Standard & Poor’s 500 down 4.32% for the day and the Dow Jones Industrial Average off 3.94%. The NASDA Composite fell 5.16% and the NASDAQ 100 plummeted y 5.54%. The small-cap Russell 2000 was down 3.91%. I think that within a few days the reaction is likely to strike investors as excessive. The trend in inflation did still point down and it increasingly looks like June’s 9.1% in the peak. And while the hotter-than-expected inflation rate did just about guarantee that the Federal Reserve will raise interest rates by 75 basis when it meets on Wednesday, September 21, most of Wall Street had already concluded that a 75 basis-point move was locked in. So what’s the hubbub, Bub?

CME FedWatch odds of 75 basis points at September 21 meeting rise to 90%–after that the picture gets murky.

CME FedWatch odds of 75 basis points at September 21 meeting rise to 90%–after that the picture gets murky.

According to the CME Fed Watch Tool, which calculates the odds of a Fed move in interest rates by looking at prices in the Fed Funds Futures market, the odds of a 75 basis point interest rate increase by the Federal Reserve at its September 21 meeting have climbed to 90%. The odds were 87% yesterday and just 68% a month ago on August 9.

And what does the market expect after that? 50 basis points higher at the November 2 meeting (83% odds) and 66.5% odds that interest rates will finish the year at 3.75 to 4.00% after the December 14 meeting. After that though, the picture gets murky. And that murkiness is the reason, in my opinion, for another Bear market rally to end 2022.

ECB’s 75 basis point interest rate increase today clears way for big Fed move on September 21

ECB’s 75 basis point interest rate increase today clears way for big Fed move on September 21

Today, September 9, the European Central Bank raised its key interest rates by an unprecedented 75 basis points and central bank officials said they were prepared to deliver another jumbo interest-rate increase at their October meeting.

Today’s 75 basis point move is unprecedented for the usually very slow-moving and conservation ECB. A second 75 basis-point move would be, what? super-unprecedented. The willingness of the European Central Bank to advance a big interest rate increase as the slowing EuroZone economy faces the very real possibility of a recession due to soaring energy costs and uncertain supplies gives the U.S. Federal Reserve more policy cover for a 75 basis-point increase when it meets on September 21.

Goldman Sachs joins the Bears:  The bottom isn’t in yet

Goldman Sachs joins the Bears: The bottom isn’t in yet

Even though today global stocks rose to put an end to their longest losing streak since 2011–with eight straight down days through Tuesday–Goldman Sachs strategists are warning that there’s more selling ahead. In its note to clients Goldman Sachs called the July move a “bear market rally.” Strategists said “Its duration and magnitude were not unusual relative to the experience of previous decades. We expect further weakness and bumpy markets before a decisive trough is established.”