December 19, 2018

Stocks surged at the open this morning, but who knows how the session with end? The Dow is currently up 175 pts and the SPX is up .68%. A few market sectors are up about 1%: energy, financials, materials. Most everything is trading higher, save gold miners and semiconductors. European markets are up about .3% to .9%, although Asia was mixed overnight. WTI crude oil, which has fallen out of bed since early October, is up 3% to about $47.65/barrel. OPEC says it will reduce production by about 1.2 million barrels per day but those cuts won’t go into effect until next month. At the moment, production in the US, Russia and Saudi Arabia is near record levels. Bonds are trading modestly higher in front of the Fed meeting today (see below). Since early November, bonds have done very well and that of course means interest rates have fallen. The 2-year Treasury note tends to move along with expectations for Fed rate hikes, and since November 8th the 2-year yield has declined to 2.66% from 3.1%. That probably means bond traders are predicting a pause in monetary tightening.

The Federal Reserve’s Open Market Committee (FOMC) will announced the results of its policy meeting today. So this is the moment of truth in the showdown between investors and the Fed. The stock market has clearly issued an ultimatum: pause your interest rate hikes, or else! There’s more to it than that, of course. Moving the Fed-funds rate target up to 2.50% from 2.25% isn’t likely to have a significant impact on the economy. But investors need to hear the Federal Reserve acknowledge that the economy is downshifting a bit and less monetary tightening is needed.

Existing home sales popped up to an annualized rate of 5.32 million units in November, which is higher than economists predicted. The volume of home sales has been trending lower all year due to lower affordability levels and generally higher mortgage rates. According to, the average 30-year fixed mortgage rate has risen to 4.6% from about 3.9% a year ago. At the same time, FHA’s US Home Price Index is up over 13% in the last 2 years. Wages aren’t growing that fast. So home price growth needs to settle down in order to brings things back into balance. But don’t pay attention to panicky headlines; housing isn’t poised to crash. We still have a shortage of housing in many parts of the country.

FedEx (FDX) CEO Fred Smith slashed forward guidance, blaming “bad political choices” such as trade tariffs and Brexit. Whereas a couple of months ago the company’s outlook was strong, apparently a surprise drop in global trade is hurting business. Some of the problem has to do with integrating a recent business acquisition in Europe, but “the severity of the…guidance cut (more than half from macro issues) is a concerning indicator of global growth.” Management is responding by cutting costs. The stock is down 10% this morning.

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