'Twas the morning of Fed Day, traders quiet... seeking wisdom
Not a creature was stirring, not even a high frequency trading algorithm.
Investors gathered together in fear
They knew in their hearts that Fed Chair Powell would soon be here.
Clients went off to each doing their own work
In the dark, all saw the "tapering of asset purchases" creature did lurk
A wink of one eye, and the tilt of his head
Any signal at all might be something to dread
Fear not, my dear fellows this soon passes from sight
Happy Fed Day to all, the script is still ours to write.
Markets
Didn't really feel too good, did it? One would think that with the Nasdaq Composite not really too far from making new all-time highs, that with the S&P 500 having done just that within the past two days, and with the Russell 2000 also on the doorstep, that a broad enough swath of boats would have risen with the tide for a more optimistic feel to spread across those of us working in the field. Yet, everyone seems to be lining up to get one step ahead of the next negative move. Everyone seems, if not afraid (because they really are not), pensive. There may be a lot of cash on the institutional sidelines. Heck there's too much cash in general, which is one big reason why the central bank has to slow down growth in money supply, especially when such growth adds little to no benefit at this point in the business cycle. I think our dear friend Doug Kass often refers to the wanton application of loose policy as "pushing on a string."
Interestingly, the Dow Transports gained on Tuesday, which was generally a day of profit taking for most traders, and that is the one index that has been feeling around for support, the one index that has been screaming loud enough for anyone willing to listen that expectations for second half economic growth were indeed suspect. On that note, the Dow Industrials seem to be almost confirming what the Transports have been communicating... which would make the Dow Theory purists most happy, if probably less wealthy.
We do know that outside of Tuesday's pre-Fed profit taking session, there has been rotation out of cyclicals, with the exception of the energy sector, and back into software and semiconductors ahead of this afternoon's Federal Reserve Bank dog and pony show.
Inside Jerome Powell's Head
So, let's think. Just what is going on inside the head of the Fed Chair or really anyone sitting on the committee (FOMC) as they roll into the Wednesday afternoon block party. Perhaps they would rather lay low a bit longer. Unfortunately, that is not an option. There must be a statement, there must be forward guidance on economic expectations, and there must be a series of questions answered publicly.
We know that consumer (and producer) level inflation has been hot at both the headline and the core. That said, we know that trend inflation (16% trimmed-mean CPI) is only running at 2.6%. That's warmish, but not hot. Median CPI, which is less meaningful than trimmed-mean, has not even lifted itself above 2.1% for any month this year after printing at 2.2% in December. We know that even in the May CPI release, that the hottest components almost all came from energy, commodities, utilities, and used vehicles. That's mostly not core, and indeed very likely transitory. Then came apparel and transportation services. That's about people going back to work. Again... transitory. Commodities are obviously (excluding oil and gasoline) at past-peak pricing. Housing prices appear to be at or close to peak, but we know that homebuilders are less optimistic and that traffic of prospective home buyers is now in decline.
Shall we move onto Retail Sales for May? Obviously retail sales are slipping as the last helicopter cash drop fades from memory. Or is it increased demand for services? Maybe it's a story more of constricted supplies due to snarls in the supply chain or a broad shortage of available labor. Acute contraction in sales of furniture, electronics, appliances, and building materials suggest that supply was more of a problem than was demand. Just an opinion.
Then there's President Biden's move toward a more globalized economy. A geopolitical positive perhaps, but clearly a deflationary force in terms of both forward looking consumer pricing as well as wages. Then again, the president has taken issue with China, a nation that has benefitted more than any other from a globalized U.S. economy in the past, making the trajectory of such pressures difficult to gauge.
There's More
That grand mosaic of information that I just tried to cram inside of your head... paints a mixed and inconsistent picture of both economic health and inflationary pressure, which means to me, that the FOMC cannot commit to anything today. Yet the committee must present a more public openness to a change in policy perhaps sooner rather than later. That means opening a door to what traders might not want to hear, and algorithms will certainly force a knee-jerk reaction to.
In my opinion, there is nothing more important this afternoon than the Fed's quarterly economic projections. This is a bigger deal than will be the carefully worded statement. As of March, at the median, the Fed as a group was looking for 2021 GDP of 6.5%, but 3.3% next year. I think we'd take that. The Fed saw 2021 headline level inflation at 2.4%, dropping to 2% flat in 2022. That's going to change. The group also saw the Fed Funds Rate at 0.1% for 2021, 2022, and 2023. What do you think about that?
One more thing. As of April M1 Money Supply hit almost $19.086 trillion. (Yes, the national debt is larger than money supply.) In April of 2020, M1 printed at $4.849 trillion. So, M1 grew about 390% from the April at the start of the pandemic to the April that just passed. The Monetary Base has grown from $4.844 trillion to $6.042 trillion over that time including $2.154 trillion in circulation and $3.887 trillion in reserves. Those reserves are the issue at this point.
There's too much cash being stashed at the Fed overnight by the banks at 0% for the Fed to keep creating $120 billion in spanking new U.S. greenbacks every month in order to fund the U.S. government at minimal cost as well as to prop up mortgage markets. I think we all know that MBS purchases are going to be wound down and that this process should have started earlier in the year. In addition, something will be done to better accommodate the nightly cash stash. Perhaps this is a way to create a valve of sorts that could permit said cash to seep from the banking system into the general economy if more structural inflation is what they are indeed in unspoken pursuit of. They might just be. Higher borrowing costs versus debased U.S. dollars? What if you only get the one?
Opportunity Knocks?
On the day that the U.S. Senate confirmed 32 year-old Columbia University Law professor Lina Khan for a seat at the Federal Trade Commission (FTC) table, President Biden has chosen the scholar to chair said commission. Khan is known to be sharply critical of the U.S. tech giants, their power in the markets where they participate, as well as the need for government action to restrain such power. Her paper "Amazon's (AMZN) Antitrust Paradox" made clear her thinking on the matter, that lower consumer prices as a positive might be an outdated concept... is of course controversial. I think her appointment makes obvious where the administration is on this matter.
Remember, we don't create the environment. We adapt to any environment and any changes made to any environment. Then we excel. We figure it out. Does her appointment damage Amazon? Facebook (FB) ? Alphabet (GOOGL) , and the like? Very possibly. Is the end result at some point an actual break-up of these firms into several unrelated firms competing in unrelated businesses? Possibly. Is that a net positive for shareholders? I think probably.
Challenges
Speaking of changing environments. We all know that most commodities outside of energy have been slapped around in recent weeks. Tuesday was particularly harsh for certain parts of, from an equities perspective... the Materials sector.
You are probably all well aware of the weaker than expected macro-economic data for May reported by China's National Bureau of Statistics this morning. Growth in Industrial Production, Retail Sales, and Fixed Asset Investment all slowed rather sharply from April and all missed already reduced expectations.
The negative here, if part of your inflation hedge is a swath of long positions in producers/miners of industrial or non-ferrous metals such as copper or aluminum, is that analysts believe that China will release state reserves of these hard assets rather than purchase or have state owned companies purchase these metals at market prices. If you are long Alcoa (AA) , Freeport-McMoRan (FCX) , or Southern Copper (SCCO) as am I, then you must also realize that if these positions are unhedged, then you are going to have to manage this risk.
None of these positions is dominant for me, but in aggregate, they would be a fairly serious gut punch. These three positions on my book are countered by a similar sized allocation toward Salesforce (CRM) and ServiceNow (NOW) . The trick here is to keep in mind that there are some gaps involved here that may need to be filled. Does that mean add on the dip? For me, it does, and if one takes proportionately rationed profits on the tech side of this trade in order to keep exposure balanced, one does not need to allocate new cash to do so. You may be down. You're not out.
Economics (All Times Eastern)
08:30 - Import Prices (May): Expecting 0.7% m/m, Last 0.7% m/m.
08:30 - Export Prices (May): Expecting 0.8% m/m, Last 0.8% m/m.
08:30 - Housing Starts (May): Expecting 1.63M, Last 1.569M SAAR.
08:30 - Building Permits (May): Expecting 1.74M, Last 1.73M SAAR.
10:30 - Oil Inventories (Weekly): Last -5.241M.
10:30 - Gasoline Stocks (Weekly): Last +7.046M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:00 - FOMC Economic Projections.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (JEF) (.95), (LEN) (2.37)
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