Educating Philip Pirrip
You knew him simply as "Pip." The central Dickens character had a clear path toward a productive, worthy trade, yet he had these "Great Expectations." Sometimes the people that make up communities, or economies, have their own great expectations. Sometimes, maybe too often, traders or investors, maybe even small investors, expect a little too much. Just what did we expect from Jerome Powell? From the FOMC?
The Fed has unlimited firepower in a fiat-currency-based economy, as long as the public retains faith. The Fed does not have a magic wand. Just what did we expect as economies reopened? Did we really think that Covid-19 would not remind us in a rude way that the virus still lurks around every corner as folks took to enjoying warmer weather? As folks took to the streets... in mass protest of social injustice.
Righteous cause? I think so. The virus has no opinion.
The virus just hopes that folks get together, and forget about distancing from the persons to their left and right. The virus hopes that you forget to, or feel foolish about wearing a mask. The virus wants to live, it needs to spread. It has become obvious that investors mistook increased debt for cash flow. It has become obvious that too many people believed that the virus had passed just as the Flu does every year.
Am I overdoing it this morning? Maybe. I sure hope so. This economy cannot truly recover until the public trusts the response of the medical community to be able to ensure and sustain a pre-Covid type quality of life. The recovery is going to be a multi-year process.
For now, as Wednesday night has now long since melted into Thursday morning, there is clearly a "risk-off" theme to the markets that has spread from Asia to Europe to U.S. equity index futures.
I have written it many times now. I will write it one more time. I think once this story is told... once the United States of America recovers economically, history will record this Fed Chair, Jerome Powell as one of the heroes. Honest. Direct. Understanding the limits of monetary policy, while pushing them out as far as creativity and initiative allow.
The Fed has basically told us that short-term interest rates will be kept close to zero for at least three years. Powell is not even "thinking about thinking" about raising rates. I really did not think raising rates was on the radar. Just my opinion.
As for the quantitative easing program, the Fed has been as aggressive as it had to be at each awful turn as the U.S. and global economies shut down by mandate earlier this year. At this point, the central bank will "increase its holdings of Treasury securities and agency-backed residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning." The current pace, though varying wildly on a day to day basis, would amount to roughly $80B in Treasury securities and $40B in mortgage-backed securities per month.
So, the Fed is, by historical measure, exceedingly dovish. This does not even go into some of the measures taken by the central bank in order to keep markets and the economy itself liquid, as markets and economies became unable to liquify themselves. Some of these programs, such as the "Main Street Lending" facility and the plan to purchase corporate debt directly, have not even launched as of yet. So, there is more help on the way. This will matter. Either this accelerates recovery, or fights off the crocodiles as the boat takes on water. The virus gets to vote on this.
Part Of The Problem
That might just be part of the problem. It's a good thing that the Fed is aggressively trying to patch holes in the dyke, as they become apparent, or even prior to their appearance. It's a bad thing that the central bank must go this route. I really do not see the point in making economic projections that by nature, must go out beyond the reasonable assumptions that must be made -- having nothing to do with trend, electoral outcomes or resultant policies.
That said, it is clear that this Fed is not optimistic. Not that the Fed's economic projections have ever been all that accurate, but folks who work in the financial community do look at them. They do react. Our central bank, to be short, expects unemployment to remain elevated beyond the current year, while also expecting consumer level inflation to return to pre-Covid levels over that timeframe.
The underlying issue with all things economic right now, is this pandemic. The SARS-CoV-2 coronvirus that causes the disease known as Covid-19 has not simply gone away, as many had hoped, as some had pretended. We saw the impact of the virus on consumer prices for May on Wednesday. Next week will bring more of the same in the forms of Retail Sales and Industrial Production.
Facts are facts. The facts are that while there has been clear progress made in controlling community spread of this virus in the most negatively impacted states such as New York and New Jersey, there is now cause for concern as new cases rise, and probably not just from increased testing in some states that had at least initially handled balancing the public health crisis with the economic crisis quite well. Troubling news now comes from the states of Texas, Florida, California, Minnesota, Alabama and Arizona, among others.
There had been an expectation that there would be some increase in spread as economies tried to reopen. Nothing had been built in that priced the kind of broad, social unrest that the nation has seen of late.
The Washington, D.C. National Guard has now reported that there are soldiers who responded to the protests that are now positive for the virus. How do you even trace that? How many states sent soldiers to assist the D.C. Guard, and then those soldiers went home? If the soldiers were infected, so were the people protesting right in front of them. Where did those people go after protesting? With whom did they interact? I certainly hope this now-growing issue remains contained. There is no way to know just yet.
Coming in Hot
Quite overtly, markets started to move back into their "Covid-19" shell on Wednesday. The move picked up velocity after the FOMC press conference, and then even more so, as trading moved off to other parts of the world. Incredibly, as the Nasdaq is indeed heavy in the kind of names that dominate the "work from home" economy, the Nasdaq Composite and the Nasdaq 100 were the only major equity indices that managed to sport a nice shade of green for the day. The Nasdaq Composite has now realized gains for eight of the past nine days.
Understand this. Losers beat winners at the New York Stock Exchange on increased trading volume. Declining volume at 11 Wall Street beat advancing volume by more than 6 to 1. What does this mean? It means what it looks like. Portfolio managers have at least started to unwind the rotation into value. At least some of this is probably driven by profit taking. How deeply does this unwind take? We've got two days to figure that out. Fear could be an issue.
Interestingly, even as the headline-level Nasdaq indices appeared to benefit, the broader action up at Times Square was not quite so pretty. Losers beat winners by almost 2 to 1, while declining volume beat advancing volume by almost 3 to 2. This came on reduced trading volume. The implication there would be that the managers taking profits out of the economically driven value proposition moved back into cash, not into tech stocks, even as tech stocks outperformed.
Need an Acronym
Don't look now, but Apple (AAPL) and Microsoft (MSFT) both passed the $1.5T mark in terms of market capitalization on Wednesday. The shares were very strong, while much of the market sold off around them. Microsoft gained 3.7% for the day, while Apple soared 2.6%.
The positivity was not confined to just those two names. Amazon (AMZN) saw a gain of 1.8% to close at $2,647.45. Yes, at that level, my target price of $2,625 has been taken. Let's see if it can be held, as the tape appears very weak early this morning. Amazon closed at a market cap greater than $1.3T.
In addition, Alphabet (GOOGL) may have "inched" 0.9% higher on Wednesday, but more importantly took back a $1T market cap valuation. For those keeping score, last night was the first night that all four of these names closed at a market cap of $1T or greater since prior to the pandemic. The precise date was February 21.
Stay safe and God bless.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Last 1.877M.
08:30 - Continuing Jobless Claims (Weekly): Last 21.487M.
08:30 - PPI (May): Expecting -1.1% y/y, Last -1.2% y/y.
08:30 - Core PPI (May): Expecting -0.1% y/y, Last -0.3% y/y.
10:30 - Natural Gas Inventories (Weekly): Last +102B cf.
13:00 - Thirty Year Bond Auction: $19B.
The Fed (All Times Eastern)
No public appearances scheduled.