It would appear that perhaps investors are becoming more comfortable with being uncomfortable.
The FOMC Minutes of the policy meeting that culminated on May 4 with a 50 basis point rate hike were published on Wednesday afternoon. Wash, Rinse, Repeat? More like... Stay aggressive on the short end (for a bit), get to "neutral" (or closer to), commence with quantitative tightening (starts June 1), and watch. Then, and only then, assuming (you know what happens when we assume), maybe, just maybe, the Fed can go back to being (Anyone? Anyone? Yes, you in the back) "data dependent." See how easy this was?
Interestingly, the markets liked it too. To be honest, I expected a more hawkish Minutes yesterday. I beefed my Wells Fargo ( WFC) long around the release. I also shorted a couple of ETFs covering both the short end and the long end of the Treasury curve. The shorts, iShares 20+ year Treasury Bond ETF ( TLT) and Schwab Short Term US Treasury ETF ( SCHO) , hardly budged (SCHO rarely does much budging, it's a place to hide), and I may cover those two positions this morning. WFC performed like a champ. That said, I will return that long position to its normal allocation size today as well.
Mind you, these Minutes, which are three weeks old when we see them, were not exactly "dovish," not in the least. Most policymakers agreed on the need to keep increasing the fed funds rate by 50 basis points per meeting, for a few meetings. There was a general understanding that the central bank may have to increase that pace or lengthen the cycle if inflation does not respond.
There was also an acknowledgement of the commencement of the balance sheet reduction plan, and just some suggestion (I think I recognize Cleveland Fed Pres. Loretta Mester) that maybe the Fed should consider the outright sale of mortgage-backed securities as an additional tool. For the record, I agree with this sentiment, as MBS does not belong on the Fed's balance sheet, at least not in size, under one condition. That condition being that the Fed closely watches conditions of overall liquidity across all U.S. financial markets and stays open to the idea of meeting in between meetings should that outright sale disrupt orderly market function at any time.
The Windy City
Currently, futures markets trading in Chicago are pricing in a 96% probability of a 50 basis point rate hike on June 15, and a 91% probability for at least another 50 bps being tacked on to the target for the FFR on July 27. That's where it slows down now.
Futures are only allowing for a 29% chance of a fourth consecutive 50 bps rate hike on September 21. In fact, these markets are "only" pricing in increases of 25 bps on September 21, November 2, December 14, and February 1, 2023. At that point, the fed funds rate rate would be targeted in a range spanning from 2.75% to 3% (currently 0.75% to 1%), and it just stops.
There are no further rate hikes priced in at this time for 2023 beyond the one in early February.
The Economy
The U.S. economy continued to show signs of rapid decay on Wednesday, as the Census Bureau released April Durable Goods Orders. While these numbers fell short of expectations from top to bottom, they are still positive. Let's not forget that.
Headline Durable Goods Orders printed at growth of 0.4% m/m versus an expectation for growth of 0.6%. Of course, March was revised lower, so this 0.4% growth is worth less than one might think.
Ex-Transportation orders increased 0.3% m/m versus the 0.6% that Wall Street was looking for. Ex-Defense orders posted at 0.3%. Wall Street was looking for a full 1% there.
Finally, core capital goods, which is a proxy for business spending, landed at growth of 0.3%, with much of Wall Street split between looking for 0.4% and 0.5%. In response, the Atlanta Fed's GDPNow model took its snapshot for Q2 GDP growth down to 1.8% from 2.4% (q/q, SAAR).
This report came on the heels of a series of disappointing results across a number of housing data points for April, as well as a number of regional manufacturing surveys for May. Readers should bear in mind that the Bureau of Economic Analysis is set to revise its initial estimate for Q1 GDP (-1.4%) this morning.
Wednesday
After 2 p.m. ET, as mentioned above, Wednesday turned into a "risk-on" affair. Small-to mid-cap stocks led the way. The Russell 2000 ran 1.95% for the session, as the S&P SmallCap 600 popped for 2.05%. The S&P MidCap 400 gained 1.94% on Wednesday.
As for large cap stocks, the Nasdaq Composite gained 1.51%, the Dow Transports popped for 1.22%, and the S&P 500 gained 0.95%. Yields across the entire spectrum of Treasury debt securities actually dipped on Wednesday, although just slightly. They have dropped further through the wee hours. I currently see the U.S. 10-Year Note paying 2.72% and the 2-Year Note paying 2.47%.
Nine of the 11 S&P sector-select SPDR ETFs gained ground on Wednesday, as cyclical and growthy sectors outperformed more defensive sectors. Discretionaries ( XLY) reversed course from earlier in the week and gained 2.82%, with Energy ( XLE) running in second place for the day at +2.07%. Health Care ( XLV) and the Utilities ( XLU) posted very minor contractions for the day.
Breadth was very strong for the day. Winners beat losers at the NYSE by roughly 7 to 2, and at the Nasdaq market site by about 5 to 2. Advancing volume took an 82.3% share of composite NYSE-listed trade and a 78.5% share of that metric for Nasdaq-listed stocks. That said, aggregate trading volume just was not there to the degree that we can get very excited about this rally. In aggregate, trading volume decreased on Wednesday from Tuesday for stocks listed at both of New York's primary equity exchanges. From an index perspective, trading volume dropped across the Nasdaq Composite, but did increase slightly across the S&P 500.
Now, we just have to ask ourselves: Was this light volume on an "up" day, just another bear market rally lacking professional participation (and conviction), or was this light trading volume the product of those professionals cramming all of their activity into the session's final two hours?
Remember what I wrote yesterday about building a base. These markets produced a trade-able bottom two weeks ago that has produced a volatile, but sideways existence.
This is a traders' market until it isn't.
Grain on the Way?
Not so fast. On Monday, David Beasley, head of the United Nations' World Food Program, said that the Russian Navy's blockade of Ukrainian ports was a "declaration of war" on global food security. In response, on Wednesday evening, Mikhail Mizintsev, a Russian Defense Ministry official, in an e-mailed statement, wrote that two humanitarian sea corridors would be opened from seven Ukrainian Black Sea and Sea of Azov port cities (including Odessa) from 8 a.m. to 7 p.m. daily.
All good? Not exactly.
The catch is that Ukrainian forces have mined these waters in order to keep Russian ships from coming in too close and to keep Russian amphibious forces from landing. For Ukraine to remove these mines would take time. It would also require Ukrainian forces to trust that the Russian Navy won't take advantage of the situation.
I'd be surprised if this amounts to much more than Russia saying, "Look, it's not us, it's them." I think we're a long way from re-establishing anything remotely close to what used to be Ukraine's agricultural export industry.
Applesauce
Early this morning, Bloomberg News is reporting that Apple ( AAPL) is, according to unnamed sources, asking suppliers to produce roughly 220M iPhones, which is line with 2021, but well below the 240M or so smartphones that analysts have been looking for that would be driven by a major upgrade cycle this autumn.
Key to remember here is that Apple does not disclose production targets and has not even updated iPhone sales information in three years. This may be hearsay. We will have no idea, given the war in Ukraine or lockdown conditions in China, how accurate news like this might be. CEO Tim Cook did warn us that Apple would suffer supply-chain issues that would negatively impact current-quarter revenue generation by anywhere from $4B to $8B.
What that means is that while this information might be true, might not be true, or might have some truth to it, it also may already be priced into the stock. I intend to add from $135 on down. Investors may have noticed that Apple is moving much of its AirPod production to Vietnam for the second half of the year, in an attempt to diversify its manufacturing base away from a China that has become quite unreliable, putting it mildly.
Stay Tuned for Nvidia
Nvidia ( NVDA) is going to require its own piece, which you can read later on Real Money. I added to my long position overnight. I'll be back in a couple of hours with something on this for subscribers.
Trading Costco
I am going into this evening long a bit of Costco ( COST) . I initiated the name in response to the beatdown it suffered in sympathy with Walmart ( WMT) and Target ( TGT) . No, I do not expect miracles, and there is a chance that 33 times forward-looking earnings, that Costco is expensive.
There is also a chance that Costco managed its margin better for the past quarter than its rivals did and that the appropriate pound of flesh has already been removed.
This is temporarily a large position for me, even after taking some off this week as I did not want to pass up these prices in case they went away. (My net basis is down to $419.04.) That said, this evening is going to be a wild one.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 211K, Last 218K.
08:30 - Continuing Claims (Weekly): Expecting Last 1.317M.
08:30 - GDP Growth (Q1-rev): Flashed -1.4% q/q SAAR.
10:00 - Pending Home Sales (Apr): Expecting -1.7% m/m, Last -1.2% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +89B cf.
11:00 -Kansas City Fed Manufacturing Index (Weekly): Last 28.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
(COST and MRVL is a holding of Action Alerts PLUS . Want to be alerted before the portfolio buys or sells these stocks? Learn more now . )
