"The only true wisdom is in knowing you know nothing."
Which Is Heavier?
A ton of crushed stone? Or a ton of feathers?
The FOMC minutes hit the tape at 14:00 ET on Wednesday afternoon, as expected. The committee is split. As expected. The markets wiggled a little, and then sort of hung in there for another seventy to eighty-five minutes. The final forty minutes of Wednesday's trading session got messy. The final fifteen minutes brought back some good, old fashioned free-fall, sans the adjective "good."
The selling was broad-based. The oddity was the delay in between the release of those Minutes, and the market reaction. Heck, Treasury markets didn't even react. Well, not on Wednesday anyway. Yield spreads have been compressed overnight.
So, the Dow Jones Industrials and Transports, the S&P 400, 500 and 600, the Nasdaq Composite and 100 all gave up a quick percent or so (give or take) on wait for it... light trading volume. You knew that was coming. Though that would, for today... be a deceptive market metric. Trading volumes stalled significantly ahead of those FOMC Minutes and then ratcheted much higher during the fifteen minutes of mosh-pit trading.
Ten of eleven sectors closed lower. There was no concentration of either defensive, or cyclical-type groups toward the top or the bottom of the day's performance tables.
I told you the beating was broad. Losers beat winners and declining volume beat advancing volume by a rough five-to-two margin for NYSE-listed stocks. The trading volume was more evenly split for Nasdaq-listed names, though losers still decisively beat winners.
The pressure has continued overnight, as Chinese authorities have curbed steel production, signaling not only slower Chinese economic growth, but the likelihood that the Chinese economy may not be the global driver of economic growth that it had been pre-pandemic. Oh, and Beijing in yet another act of economic self destruction (or more likely concentration of power), hit their own tech industry with yet another round of regulation.
So, I ask: Which is heavier? A pound of sand or a pound of cotton?
What Could Possibly Weigh Upon Such a Liquid Marketplace?
Tighter monetary policy? Reduced certainty around increased fiscal largesse?
America's reduced ability to lead, or to prevent trouble in global hot spots? America's traditional allies showing a consensus of rising frustration with Washington?
Beijing's assertion of domestic and regional authority, regardless of the economic consequences?
A pandemic threat to normalized human interaction that never seems to wither for very long, thus constricting supply lines and crimping international trade?
Increased inflation that at least in part will be structural? Labor markets that may or may never, depending on this virus, return single parents and second earners to the labor force?
Or is it simply all of the above?
Tiptoe Through the Tulips
The S&P 500 closed at 4400, breaking through its 21-day exponential moving average (EMA) on Wednesday. This has happened on five other occasions since late March and in each of those instances, the index went on to test its own 50-day simple moving average (SMA), currently 4345.
The Nasdaq Composite is already there. This index closed at 14,525, actually below the 50-day SMA at 14,536. With equity index futures trading lower on Thursday morning, support for this index, if it gets real ugly, may have to be found close to 14,200, which was resistance in June and support in July.
Long Story Short
The FOMC Minutes are three weeks old by the time we read them. Jackson Hole is next week. Federal Reserve Chair Jerome Powell will speak. The next FOMC policy decision is set for Sept. 22. The Federal Reserve has a long-standing dual mandate, allowing the central bank to act in order to facilitate price stability and/or maximum sustainable employment.
Long story short: There are two factions currently debating over timing the reduction of the central bank's asset purchase program.
One group, the "hawks," want to get the ball rolling soon, as in this year, in response to what has already been elevated (but not yet persistent) consumer-level inflation. This group feels that the Fed is already behind the eight ball in case economic growth sputters (economic growth is sputtering) earlier than forecast and the central bank is in no position to ease policy.
The other group, "the doves," would rather wait for more labor market data, and leave ultra-easy monetary conditions in place until labor markets are close to being fully recovered. This group sees current erratic macroeconomic data-points as lumpiness due to the pandemic, and not as signaling an actual slowdown.
While a high school freshman with an interest in monetary policy would have seen the need to withdraw the purchase of $40 billion worth of mortgage-backed securities six months ago, the FOMC for one reason or another, has not.
Reducing the $80 billion worth of U.S. Treasuries per month is much trickier. All might seem good to go, with less borrowing currently planned by the U.S. Treasury Department moving forward, and that would diminish any impact on interest rates created by the removal of a large price-insensitive buyer from that market. However, we all know that both houses of Congress are debating, or are soon to debate large spending packages that will require increased money supply created in an artificially manipulated environment for price discovery.
I think Jerome Powell sets the table next week. I think the talk around removal of accommodation gets real in September. Even if the committee does not act or act aggressively this year, remember that with the turn of the calendar, Bostic (Atlanta), Barkin (Richmond), Daly (SF), and Evans (Chicago) -- three and a half "doves" -- lose their policy vote, to be replaced by Bullard (St. Louis), George (KC), Mester (Cleveland) and Rosengren (Boston) -- currently that's four hawks, two of the "perma" variety and two that go back and forth.
Long Story Shorter
The U.S. economy's next recession has already been scheduled. We just don't have a specific quarter just yet.
How About This?
Demand for the Federal Reserve's reverse repurchase facility reached for the sky on Wednesday, as money-market funds and financial institutions parked an incredible $1.12 trillion in the facility overnight attracted by not just safety but that juicy 0.05% rate. Yummy. Better than parking a trillion bucks in a hole in the ground and covering it with a heavy stone.
Get used to high numbers here, gang. As debt-ceiling talks stumble around, short-term Treasuries (T-Bills) will become scarce. Heck, everything up to 2-Year Notes might become scarce. With tremendous liquidity already sloshing around the banking system (and real economy) as the Treasury Department has backstopped the entire economy, including to some degree, households throughout this pandemic, money has to land somewhere every night. That 0.05% sure looks a lot better than paying more than face value for short-term paper.
You do get that, right? By paying more than nothing for overnight cash, the Fed is keeping short-term interest rates from going to the dark side. Darth Vader once said that there "is great power in the dark side." Negative rates do not seem to have worked any magic in economies where they have become the norm.
The Fed is doing the right thing here, but it sure has an ugly look to it.
1) Nvidia (NVDA) ... is a beast. All hail Jensen Huang.
2) Lam Research (LRCX) ... still waiting. We're all cammied up out in the weeds. Snakes and bugs all over the place. Don't move a muscle. Waiting for this name to hit its 200-day SMA, which it still has not done. Do I necessarily want to buy anything in this suddenly slippery environment? No. Will I make myself buy some of this if I get my price? Yes. My price is $565, BTW, and I will start with just a small increment.
3) Looking to add to my Abbott Labs (ABT) long if we can just get it down to the 21-day EMA ($122). It's not like testing is going to become less important when schools open.
4) Remember two weeks ago, when folks acted like I was a nut for raising cash? It's never as much about getting it right as it is about risk management. Capisce?
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 370K, Last 375K.
08:30 - Continuing Claims (Weekly): Last 2.866M.
08:30 - Philadelphia Fed Manufacturing Index (Aug): Expecting 24.6, Last 21.9.
08:30 - CB Leading Indicators (July): Expecting 0.7% m/m, Last 0.7% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +49B cf.
The Fed (All Times Eastern)
No public appearances scheduled.