POST FED MEETING HANGOVER

Stocks opened lower this morning (Dow -104 pts; SPX -.58%). There is a bit of pouting among traders in the wake of yesterday’s Fed meeting (see below). Interest rates are rising, and that means bank stocks are up and utilities & real estate are down. Commodities are mostly lower in early trading. Copper has lost about 5% over the last two days. WTI crude oil tumbled more than 3% today to trade around $61.30/barrel. US oil stockpiles are at a two-year high while the volume of US production is at record levels. Bonds are falling in price as a result of the Fed meeting. The 10-year Treasury yield snapped back to 2.55%. Apparently, some traders had positioned with the expectation that the Fed would discuss cutting interest rates in the near future. That seems terribly misguided but appears to have been the case.

The Federal Reserve’s key policy-making committee wrapped up its monthly meeting yesterday. Not only did the FOMC decline to raise interest rates, but it also said it doesn’t expect to raise or lower interest rates in the near future. Fed Chair Powell said the “economy continues on a healthy path.” Wages are moving up at an appropriate rate and the labor market is very strong. His view is that the domestic economy is neither too hot, nor too cold. In addition, he said recent economic momentum in China and Europe has improved a bit. In light of this outlook, the Fed still believes that low inflation is transitory and will return to their 2% target. The FOMC did agree to slow the rate of its balance reduction, cutting in half the amount of Treasury bonds allowed to mature without reinvesting.

The VIX Index, trading around 14, is still very low compared with December’s spike above 30. But one thing we’ve learned over the past year is that volatility can explode at any time with little warning. Bloomberg ran an article describing how individual stock volatility is much higher than one would think given that the S&P 500 Index is up something like 17% this year. Thirty-three of the S&P’s companies have experienced single-day losses of 10% or more in 2019. That’s a statistic typically associated with a down-trending market. “While it creates a little chaos, it’s also reason for traders to shift money into other stocks. As a result, shares are moving out of step with each other at one of the fastest rates in a decade and the broad market keeps marching higher.”

All eyes will be on tomorrow’s Employment Situation Report. Not only will we get fresh information on the strength of the job market, but more importantly, wage inflation data. Average hourly earnings for US workers are expected to accelerate to 3.3% y/y growth. Wages have been steadily rising since last October, but not fast enough to spark inflation throughout the economy.

CNBC reports that US and Chinese trade negotiators are close to a deal. It could be announced as early as next Friday. But don’t expect an announcement to boost the stock market. This could very well be a sell-on-the-news type of event unless the deal is substantial enough to change the current status quo.


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