If the mission was to set the table for possibly setting the table or talking about withdrawing accommodation in order to talk about withdrawing accommodation, then "mission accomplished."
At first glance, at least to this long-time Fed watcher, Wednesday's official FOMC policy statement came off as mildly hawkish. It became clear rather rapidly however, that markets, or more precisely keyword reading algorithms, saw it differently. Both the S&P 500 and the Nasdaq Composite hit their lows for the regular trading session as that statement was made public, and proceeded to rally for about an hour, only hitting resistance as the Fed Chair wrapped up his press conference. (Read Tom Graff's expert analysis here.)
The U.S. Dollar Index, the DXY, peaked ahead of the Fed... and proceeded to sell off into the night and beyond. The "dixie," which seemed to be pressuring the 93 level from below one week ago, pressures the 92 level from above as late Wednesday night melted into early Thursday morning. U.S. Treasury securities, most especially the belly out to the long end of the yield curve, saw investors move sharply out of those instruments ahead of the statement and then back in, ultimately reducing yields into Wednesday evening, before again backing off. Yields seem to be back on the rise very early on Thursday morning for the U.S. 2-Year Note out to the 30-Year Bond, but not all that aggressively.
Are traders and investors confused? Possibly. Was that the intent? No, but I think Jerome Powell is fine with that. What he did was put it in the mind of everyone who watches or participates in both the economy and the financial marketplace that there is serious discussion about peeling off a bit of the central bank's monthly asset purchase program, but the timing of such a move could still be well off. We talked about this on Wednesday morning. The idea was to keep all options open, and that was done. Jackson Hole will be hot.
Unfortunately, as I have been quite outspoken about the now dire need to remove mortgage-backed securities from the regularly scheduled program, our central bankers appear to disagree. Without actually saying so definitively, Powell intimated that MBS purchases will be reduced when Treasury security purchases are reduced, though he made no promises that the two separate product lines would be tapered back at the same ratioed pace.
Basically, Powell needs to see more improvement broadly across the economy, but specifically across labor markets. Labor markets cannot fully recover until the supply side of that market is replenished. The supply side of our labor markets cannot be replenished until there is no longer a need for one household parent or guardian to stay home with the children (an insurmountable issue for one parent households) and others to return less fearfully to participation. In plain English, Powell sort of told us he will focus on labor markets over inflation (which he still sees as mostly transitory, and to some degree so do I), and labor markets cannot self-correct until the pandemic is not a factor in regional, local and household decision making.
For those wondering, at last glance, futures markets are not pricing in any actual increase to the fed funds rate until March 2023.
What the Fed Did Do
What the Fed did was launch two new facilities that are designed to provide liquidity, and ensure that the inner workings of the economy do not grind to a halt during a crisis. The idea was to provide a permanent facility to reduce ad hoc or "as needed" reliance upon repurchase agreements to provide liquidity on a daily or nightly basis to financial institutions using Treasury securities or mortgage debt products as collateral. The new facilities will be effective on Thursday (today).
The first of these two standing repo facilities will take Treasuries, and agency-mortgage-backed securities from primary dealer firms in exchange for short-term (one-day) loans in cash at a rate of 0.25%. There will be a daily cap of $500 billion on this facility. The second facility is aimed at foreign central banks and is meant to be much smaller. This was the right step to be taken and was not only expected, it is actually quite late.
Two bones to pick here, call me petty. One, though priced to discourage active usage, why not cap the facility at a much higher level, say $1 trillion or more? This way the ammo is there in a time of an extreme short-term liquidity crunch without having to fall back on the ad hoc method.
Two, why the heck are deposit-taking banks not included in having access to this facility? I know the Fed did say that they would be added at some point in the future, but is this not where a shortage of easy liquidity would strike the hardest from the public's point of view? Got me, Jay. That's important.
1) Beef up the facility. 2) Grant access to all U.S. banks that have the collateral and are in good standing.
There. See how easy that is.
Better Day Than You Think
To the casual observer, Wednesday's equity market performance was a non-event. The Dow Jones Industrial Average backed up 0.36%, the S&P 500 came as close as a major index can to ending any day "unchanged" (-0.02%) in the decimalized (non-fraction)/algorithmic (non-human) era, while the Nasdaq Composite posted a fairly nice gain of 0.7%.
There was, however, a separation between small-to mid-caps, which traded higher, and the Dow Transports, still suppressed by delivery services and the rails. Often, as both are reliant upon the business cycle, smaller-caps and transportation-focused large-caps move together. That said, while aggregate trading volume moved sideways from Tuesday to Wednesday, breadth was really quite good. Winners beat losers by almost 2 to 1 at the NYSE, and by 5 to 2 at the Nasdaq, while advancing volume beat declining volume by 7 to 2, and 4 to 1 at those two exchanges, respectively.
In addition, four of the five defensive sectors took the bottom four slots out of 11 on the day's performance table. Sarge faves and recently profiled trade ideas at Real Money, Advanced Micro Devices (AMD) and Cleveland-Cliffs (CLF) , both appeared to break out.
Late Wednesday, Robinhood Markets (HOOD) priced at $38 per share, which was at the bottom of the range ($38 to $42) of expectations. The company and the company's co-founders sold 55 million Class A shares at that price. The company should net $1.9 billion from this offering.
The deal is being led by Goldman Sachs and J.P. Morgan. If Goldman is running the book, this thing won't open until 1 p.m. ET. so I would not get all fired up if I were you.
On that note, I wouldn't get fired up at all. Hard pass.
Surprise! Surprise! Surprise! Looks like the U.S. Senate's bipartisan infrastructure deal has made a place for imposing stricter rules (and taxes) on cryptocurrency traders/investors in order to help fund the transportation and power portions of what will probably soon be an infrastructure bill. You had to know this was coming.
What is now part of the plan would raise an estimated $28 billion from transactions in cryptocurrency markets as crypto-brokers will be required to report transactions of digital assets to the Internal Revenue Service, including requiring all businesses to report crypto-transactions valued at $10,000 or more.
"Tesla (TSLA) makes electric cars for people who like electric cars, Ford (F) is making electric cars for people who like cars."
-- Your pal, to Katherine Ross of TheStreet (29 July 21)
Ford Motor (F) reported its second-quarter results on Wednesday night. The company posted GAAP EPS of $0.14 or adjusted EPS of $0.13, easily beating expectations either way. Revenue generated for the period landed at $24.12 billion, up 45.1% year over year, a whopping $1.3 billion ahead of the Wall Street consensus. Despite the ongoing chip shortage that placed a drag on both production and volume, Ford generated EBIT of $1.1 billion for the quarter thanks largely to pricing power and demand for SUVs, trucks and the company's electric vehicles.
The company stated that demand for the electric Mustang, electric F-150, Bronco, and the new Maverick are backordered to a staggering (my word) degree. CEO and President Jim Farley said, "Overall, after effectively managing through the first half, we are now springloaded for growth in the second half and beyond because of those red-hot products, pent-up demand and improving chip supply." That's right, gang... Tesla (TSLA) sounded quite cautious about chip supplies. Ford tells you that the situation is improving.
Ford also lifted its outlook significantly, taking 2021 adjusted EBIT to $9 billion to $10 billion from $6 billion to $7 billion, and taking 2021 free cash flow to $4 billion to $5 billion from $500 million to $1.5 billion. Ford sees volumes increasing by 30% for the second half of the first. Rock and roll.
The Ford Setup:
Long the equity (large position), Long July 30 $13/$14 strangle for a $0.37 debit.
So far... muy excelente.
The ServiceNow Setup:
Long the equity (large position), Long Aug. 6 $585/$600 bull call spread for a net debit of $6.20.
So far the equity investment has been wonderful. The options trade may have been a waste of money.
The Facebook Setup:
No equity position (kind of dislike these guys). Long Aug. 6 $370/$360 bear put spread for a net debit of $3.90.
So far, if the pre-opening level holds, this one will have worked to perfection.
Tonight is Amazon (AMZN) night, the Super Bowl of earnings season. I am long the name (mid-sized position), and that is how I think I will go in. If only CEO Andy Jassy would mention an eventual stock split this would, in my opinion, turn into a lottery ticket.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 377K, Last 419K.
08:30 - Continuing Claims (Weekly): Last 3.236M.
08:30 - GDP Growth (Q2-adv): Expecting 8.4% q/q, Last 6.4% q/q SAAR.
10:00 - Pending Home Sales (June): Expecting 0.0% m/m, Last 8.0% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +49B cf.
The Fed (All Times Eastern)
No public appearances scheduled.