CROSSCURRENTS GIVE THE FED PAUSE

Stocks opened lower today, but quickly recovered. The Dow and SPX are currently flat. Financials, energy and tech sectors are in the green but most everything else is slightly lower. Copper, iron ore and oil are strong today. WTI crude oil is back up around $55.75/barrel. Copper is now up something like 13% on the year, and that’s usually a sign of economic strength overseas. Strangely, bonds are trading mostly higher as well. Long-term Treasury bonds are up about .2% and junk bonds are up nearly that much. The 10-year Treasury yield fell back to 2.65%. Since the beginning of February, interest rates have been treading water with very little volatility.

In my opinion traders, not investors are now driving the bus. The SPX has already retraced over 75% of its late 2018 correction. So the stock market is no longer drastically undervalued. Also, the index is hovering around a critical technical level that corresponds to two prior near-term peaks in Oct. and Nov. of last year. It will either fall back and “consolidate” for a while, or it will zoom back to last September’s highs. Traders are puzzling out what catalysts—such as a trade deal—could spark a fire.

Federal Reserve Chairman Jerome Powell is offering semi-annual testimony to congress regarding monetary policy today. He is choosing his words carefully. “While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals.” He noted that financial markets have been much more volatile, and financial conditions are not as supportive of growth as they were. What he means is that economic growth has stepped down from 3%+ to a lower but still healthy 2.5%. Corporate earnings growth is slowing substantially from 20%+ last year to about 5% this year. Among the crosscurrents is a very healthy US job market with rising wages, juxtapositioned against weak growth overseas. In addition, the stock market has been recovering nicely while the bond market is also rising. And despite a distinctly dovish shift by the Fed over the last six weeks, the yield curve isn’t steepening. All these “crosscurrents” are keeping the Fed from raising interest rates.

We got some delayed housing market data this morning. Housing starts—ground breaking on new developments—continued to fall in December. Construction companies slowed down as low affordability began to really affect demand. The key issue seems to be that home price growth outpaced wage growth for too long, and when mortgage rates began to rise, homebuyers balked. So now we’re seeing a bit of a reset. The S&P Case-Shiller Home Price Index rose 4.7% in December—the slowest rate of growth in the last 3 ½ years. Bloomberg sees some early signs of improvement in the housing market this year. Homebuilder sentiment improved last month, mortgage rates are back down around 4.3%, and wage growth is accelerating.

A federal appeals court judge upheld a prior court decision allowing AT&T (T) to acquire Time Warner (TWX). The US Justice Dept. has aggressively sought to kill the $85bil deal, saying it would limit competition in the pay-TV industry. AT&T actually closed the deal after the last ruling, but the DoJ chose to pursue an appeal. The whole thing has dragged out for more than two years. As a result of today’s ruling, you can expect to see more mergers (called vertical integrations) in the media & telecom industries.


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