Not your average day? Not at all. Perhaps the most interesting thing, in my opinion, about Tuesday's regular trading session was the rebound. The first "official" losing session after a five day winning streak for the major large-cap indices actually looked more positive to me by day's end than had a couple of those "winners" after all was said and done.
The trading day here in North America got off to a weak enough start after Beijing had simply harpooned domestic Chinese profitability wherever it seemed that corporate leadership had either become too independent, had decentralized power, or worse... off-shored some of that power. U.S. investors got to thinking... if Beijing is willing to crush their own businesses in order to assert control, prioritizing power and loyalty above all, as is the norm with totalitarian regimes, then what if Beijing plays the power game with foreign firms reliant upon Chinese revenue, Chinese labor, or simply Chinese economic growth?
That's a whole different cup of tea. For if assertion of power is the priority, and not margin, then all kinds of multinational large-caps might be in over their heads. Almost all U.S. semiconductors firms rely on China to drive sales. That would include Qualcomm (QCOM) , Texas Instruments (TXN) , Micron (MU) , and even the two Sarge faves... Nvidia (NVDA) and Advanced Micro Devices (AMD) (which reported las night).
One would think that firms like Apple (AAPL) , Tesla (TSLA) , and Nike (NKE) might escape Chinese scrutiny as all produce goods and provide jobs behind the iron curtain, yet if the idea is to prove a point, and not to drive economic performance, or reach a certain standard of living, then who can guess what is and what is not safe as the "rules" change both daily and arbitrarily.
Sacrificing economic growth in mainland China could force sizable downward revisions for U.S. firms operating in the materials, energy, and industrial sectors. No doubt about that. On Tuesday, the Energy sector select SPDR ETF (XLE) closed -0.93% for the day, in ninth place of the 11 SPDR sector ETFs. Now, the Dow Jones U.S. Coal Total Stock Market Index surrendered 5.47%. Think about that. It's not like too many nations in the developed world still burn anywhere close to the amount of coal that they used to. It's not like climate change is a big deal in China, and beyond Chinese big tech, it was U.S. coal that took the worst hit as Beijing cracked down on their own. Hmmm.
Then It Got Worse
U.S. equity markets lurched lower as reports surfaced that a British carrier (HMS Queen Elizabeth) strike force of eight warships had sailed into the South China Sea fresh off of wargaming with the Indian and Singaporean Navies. Suddenly, the only industrials trading higher seemed to come from the Defense and Aerospace industries. Lockheed Martin (LMT) , General Dynamics (GD) , Raytheon (RTX) , which had reported earlier, Northrop Grumman (NOC) , and L3 Harris (LHX) stood out like a sore thumb as the Industrials sector select SPDR ETF (XLI) closed -0.55%, but the Dow Jones U.S. Defense Index tacked on 1.12%. Hmmm.
Then, a Rebound
It seemed as if for no reason at all. The algorithms that now determine price discovery all turned at one time (around 13:30 ET), and bought the dip. There was good reason though. Plenty of reason. As the S&P 500 ricocheted off of its 50 day SMA last Monday, pulling the other major equity indices higher that day...
... so the Nasdaq Composite, which was catching the worst beating at the time, did so on Tuesday... at its 21 day EMA.
That turning point may have been sparked technically, or more likely the trigger was a number of scattered headlines claiming that Senate Republicans, after balking earlier at an offer from Senate Democrats, had countered with a beefed up dollar amount targeted at public transit that brought the two sides negotiating the much ballyhooed bi-partisan infrastructure package closer together. Yes, negotiations have likely also brought the price tag for this proposed package closer to $1 trillion than the $579 billion where it had started.
Both sides seem to agree that they are now in the ballpark of a deal, and that brings into focus the president's fiscal agenda that includes the $3.5 trillion social program spending package that will end up being a strictly partisan issue. While that price is certainly daunting, this is one big reason that one can not with certainty speak to the future of domestic U.S. economic growth, nor inflation. While it does appear to this observer that growth will decelerate and that consumer level inflation will to a degree be transitory, such a large package will boost non-organic economic growth short to medium term, while rekindling the fire under the current burst of inflation.
As we have said several times over recent weeks, fiscal policy will be a more impactful driver for U.S. markets in the immediacy than will monetary policy, and we say that as the FOMC will make an official policy statement this afternoon (Wednesday).
Big talk is just talk
Unless, unless you're backing it up
Big talk is cheap talk is
Only words unless you're backing it up
- Dixon, Lane, Allen, Sweet, Turner (Warrant), 1989
No mystery here. The FOMC will hold rates where they are, not just at the conclusion of this two day policy meeting, but possibly into the monetary policy death (of the debt super-cycle) spiral and beyond. We get that. Recent developments around the spread of the Delta variant and other mutations of the SARS-CoV-2 coronavirus provide more than enough cover for the Fed to remain patient, which is as we know, their collective preference at this time.
The fact is that when you make a financial decision, you try to keep your options open as long as possible in order to remain as flexible as possible for as long as you can gather information. Fed Chair Jerome Powell and his crew are no different in that regard. The object of this meeting, in my opinion, is to take close to no action whatsoever, while preparing the economy as well as the financial marketplace for any eventuality that may arise. Sounds wordy. It is what it is.
My feeling is that the FOMC will use today to set up Jackson Hole in a month to set up a potential tapering of asset purchases that could become policy if conditions still support the idea as soon as the September meeting. Many economists are of the opinion that actual changes will not be made to the central bank's asset purchase program until early 2022. My feeling, as readers well know, is that getting monthly purchases of mortgage-backed securities from $40 billion down to zero is a more urgent need than that.
You all saw the HPI's (Home Price Index) for May that printed on Tuesday. Case-Shiller told us that home prices are up 17% year over year. The Federal Finance Housing Agency (FHFA) told us that home prices are up 18% over that same year. Either way, supporting markets for mortgage backed debt has harmed the economy. Yes, I am an older home owner. Though I have not sold a home anytime in the recent past, I have, on paper, benefited. The nation, however, does not benefit when younger demographics or those comprising the lower to middle sections on the income curve are prevented by policy from developing in the way that prior generations had. It is policy that has prevented household formation as well as upward mobility, and no policy has probably driven this imbalance in outcome more so than supporting mortgage markets long after real estate markets themselves had entered deeply into "bubble" territory.
This afternoon, I would expect that the official statement could reflect increased concern over consumer prices, which will be seen as hawkish. Any mention of the Delta variant specifically would be seen as dovish and could be used in the statement to counter any market reaction to the possible mention of that increased inflation prior to any impact at the point of sale for either debt or equity markets. Yes, this is threading a needle. No, this is not that difficult. The Fed Chair will be pressed on both of these issues in the press conference. Closing bell prices at least for today, will be determined by his ability to tap dance, even with no music.
Alphabet (GOOGL) , Advanced Micro Devices (AMD) , Apple (AAPL) and Microsoft (MSFT) all hit the ball out of the park last night. Say it with me... All Hail Lisa Su. I would obviously like to cover all four of these in depth for you. Clearly there is not the space for that here, and I will likely have to go with just one for a second piece later this morning. I am long three of four, so it is not easy to choose from among one's children.
Carry on for now. I will be back in a couple of hours with that second piece and I'll catch you after the bell this afternoon with Katherine Ross at TheStreet as we cover the Fed as well as pertinent earnings.
Economics (All Times Eastern)
08:30 - Goods Trade Balance (June-adv): Expecting $-87.9B, Last $-88.11B.
08:30 - Wholesale Inventories (June-adv): Expecting 1.0% m/m, Last 1.3% m/m.
10:30 - Oil Inventories (Weekly): Last +2.018M.
10:30 - Gasoline Stocks (Weekly): Last -121K.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)