Sticks and Stones
They say that words will never harm. Certainly not those long the equity space if those words are uttered by central bankers opining on potentially looser monetary policy. An old method for preventing the possibility of accidentally squeezing off an unwanted round or two is to travel with one's thumb and trigger finger spread around the pistol grip of a weapon with the thumb poised to flip off the "safe" while also sliding the pointer into the trigger well in one smooth motion. One smooth motion requiring two steps. Allows the brain to stop a mistake from happening.
Investors, it would seem were not only at the ready but had filed down the necessary mechanisms to create a hair trigger. There would be a swift reaction to comments made by key committee (FOMC) members that turned around what had been a retreating equity market. Not to mention the bullish impact on shorter-term Treasury securities and the U.S. dollar that weakened sharply at the time.
Initially, it was New York Fed President John Williams who uttered "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress" in his keynote address before the annual meeting of the Central Bank Research Association from New York City with roughly two hours left in the session. Then it was Richard Clarida, a member of the Fed's Board of Governors who really juiced markets in an interview from Washington with Liz Claman of the Fox Business Network, who said, "You don't have to wait until things get so bad to have a dramatic series of rate cuts." and then this... "You don't want to wait until data turns decisively if you can afford to."
Anyone else noticing that we always seem to be months ahead of the Fed on their own policy decisions here at Market Recon... and then they do eventually get where we already were? Could save themselves, and the financial markets a lot of back and forth, just by listening in the first place. Why listen to practitioners who have had to adapt to changing conditions in real time when one can toy with economic modeling?
He Said What?
The New York Fed made an unorthodox move later on Thursday afternoon. After seeing how quickly markets had reacted to words spoken by Williams and Clarida, a spokesperson for the NY district tried to clarify what Williams had said in order to ratchet down expectations. "This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting." Interesting. Futures trading in Chicago had priced in a 60% probability of a 50 basis point reduction to the Fed Funds Rate on July 31st, up from less than 40% in reaction on Thursday afternoon. The NY Fed's tamping down of Williams' comments have taken those odds back down to roughly 50% as I bang out this note in the extreme early Friday hours. Yields and the U.S. dollar are now off of their overnight lows, while Gold has retreated from the overnight highs. Apparently traders have come to grips that the Fed might be unsure about their trajectory, or the NY Fed would not have made a statement.
My thoughts? Well, gang... we know that the FOMC is not going to raise rates in July, and there is not even an inkling of doing so on the horizon. The argument will be between a 25 basis point cut and a 50 basis point cut. (By the way, that third cut, or .75% lower than what we have today, is now priced in for October, when December had been more or less 50/50.) What the Fed needs to do in July is to cut the FFR by 25 basis points and put the balance sheet management (QT) program to bed two months early. That's your 25-plus basis point move, and it keeps policy logical by not easing on one side and tightening on the other. This stuff is easy if you don't complicate it. So, don't complicate it. St. Louis Fed President James Bullard speaks at 11 am ET on Friday morning from the same dog and pony show where Williams appeared on Thursday. Bullard has been a friend to the equity market in recent appearances.
What happened was that professionals went from being on the lookout for a day of institutional distribution to actually watching broader markets rise on increased trading volume. Does that in fact reconfirm what was starting to seem in doubt, the market's uptrend? Technically, maybe. How's that for dodging a tough question. I say that only because there was a precise catalyst (okay, two precise catalysts) for what we saw, and at least one of those speakers must have at least partially regretted how those words were taken. Forget the Dow Industrials. That blue chip index is too narrow in focus to be a guide, and was kept in place on Thursday by strength in International Business Machines (IBM) that was countered by weakness in Untied Healthcare (UNH) and Boeing (BA) . Boeing, btw, is higher overnight.
The broadest and most highly focused upon equity indices, the S&P 500 and the Nasdaq Composite both finished 0.3% to 0.4% higher on good volume. One item of note, Match (MTCH) cracked on Thursday. Tat pivot point of $75 that we gave you on Tuesday? I told you at the time that I would be a potential buyer of that name in such an event. I now look to grab a few on a likely re-test of the level. $90 beckons if it holds. Just my opinion.
Net Interest Margin
Pressuring short term yields can be a positive for those looking for a steeper yield curve. At least it prevents the curve from completely collapsing upon itself should the ECB herd yield starved foreign investors into the U.S. long end next week. Think I'm out of my mind? Bank stocks don't think so. Understand this. On a day where yields were pressured, the Financial sector outperformed the broader markets, while the banking industry outperformed the financial sector, and within that group, regional banks (heavily reliant upon NIM) for the most part kept up with big money centers that have a few more ways to skin a cat. Sorry kids, I'm a dog guy. Check this out.
Notice how for the larger banks that algorithmic support has indeed shown it's face precisely where investors would have hoped. With the 50 day and 200 day SMA's running only a few cents apart, this one was easy to pick up on. Now, for the regionals...
Quickly, we see even with a 1.14% rise, this regional banking index still has some wood to cut in order take the 200 day line. There is a nice series of lower highs coupled with higher lows here, suggesting to me a move of some violence, even more so than Thursday's rally may still be in the offing. Of these regional banks, U.S. Bancorp (USB) seems to me to be very close if it can build on Thursday's reaction to earnings... to be very close to a true breakout.
Here, you'll see that we do not have anything like the closing triangle that we see for the rest of the regionals. Here we do see the recently higher lows, but coupled with a share price that is breaking above resistance that has held for more than a year and a half. In addition, these shares are now leaving the 50 and 200 day SMA's in the dust. Too late? Perhaps. I expect to buy a few shares on the next weakness I see. This one smells like a winner to me.
I am not going to pound the table for Microsoft (MSFT) . Did that yesterday. You guys already knew that my $160 price target was among the highest for this stock on Wall Street. That is changing as the analyst community plays catch up this morning. What I thought very notable in the firm's quarterly results was just how well rounded performance is. Yes, I heard that video games are not so hot. Yadda, yadda, yadda.
Microsoft generated $33.72 billion in revenue (+12.1%) for the quarter. The Intelligent Cloud drove home $11.4 billion, (Azure saw revenue growth of 64%), Productivity and Business Processes (Office, LinkedIn) bagged an even $11 billion, while Personal Computing printed sales of $11.3 billion. That last segment includes video games, but also Windows, and Surface laptops.
Think about this line-up. Hitting on all cylinders. Growing new businesses, while finding ways to not just keep legacy business line relevant, but growing them. This Satya Nadella (the CEO)? This guy is the best they've had.
Economics (All Times Eastern)
10:00 - U of M Consumer Sentiment (July-adv): Expecting 98.6, Last 98.2.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 784.
The Fed (All Times Eastern)
11:05 - Speaker: St. Louis Fed Pres. James Bullard.
14:30 - Speaker: Boston Fed Pres. Eric Rosengren.
Today's Earnings Highlights (Consensus EPS Expectations)