Beige Book States US Economy Grew At “Slight To Modest Pace”

Stocks Fall Slightly Despite Bad News

It's surprising how well stocks held up on Wednesday. Especially considering the fact that the retail sales report missed estimates. And the Chicago Fed President called for no more rate cuts this year and next year, just like the FOMC. It’s interesting because whenever any bad news comes out and stocks do poorly, people say the Fed helped stocks move higher. 

Bad news equals lower rates. You’d think in this scenario, when a Fed President goes against dovishness, it would cancel that out. However, the odds of rate cuts still rose. Fed funds rate ignored what the Chicago Fed President stated. That’s not irrational, but it is interesting to see in plain sight.

Trade War Uncertainty Put Into Perspective

There hasn’t been much news on the China trade situation other than prognosticators claiming a significant deal isn’t likely. In the absence of major details, many are skeptical anything good will come of the talks. As you can see from the chart below, the uncertainty on trade only rivals the uncertainty related to the Asian financial crisis going back to 1990. 

President Trump is now meeting with European leaders. He wants Italy to spend more money on defense as it spends just 1.1% of GDP which is below NATO’s goal of 2%. A potentially concerning aspect is President Trump claimed America would easily win a trade war with Europe. Mostly because America has a trade deficit with the bloc. Investors are nervous he will add more tariffs on Europe. The higher stocks rise, the more emboldened he will get to add more tariffs.

Review Of Wednesday’s Trading Session

Retail sales report wasn’t terrible and the August reading was revised higher. However, it missed estimates which you’d expect to cause stocks to fall significantly. Instead stocks barely fell and the odds of rate cuts increased. That’s despite the fact that stocks have rallied sharply recently. They weren’t as oversold as they had been earlier in the month.

Specifically, the S&P 500 fell 0.2%, the Nasdaq fell 0.3%, and the Russell 2000 rose 0.12%. VIX increased 0.14 to 13.68. It is very low because of the rally in the past few days. CNN fear and greed index rose 5 points to 47. It’s neutral even though stocks are near their record again.

Best 2 sectors were consumer discretionary and materials which rose 0.41% and 0.3%. Worst 2 were tech and energy which fell 0.71% and 1.49%. Sector performance is heavily impacted by earnings season which is well underway. Let's discuss 2 of the major reports from Tuesday. 

Updates On Monetary Policy

Odds of rate cuts increased because of the disappointing retail sales report. And, odds of a rate cut in 13 days are 87.1% which is up from 73.8%. Just in case you thought there might be a chance the Fed doesn’t cut, the odds solidified that there will be one. 

A rate cut in December has been taken off the table as the odds of 2 more cuts this year are only 23.1%. Chicago Fed President didn’t guide for any more cuts. Charles Evans stated, “I think policy probably is in a good place right now. All told, the growth outlook is good, and we have policy accommodation in place to support rising inflation.”

It was a busy day for monetary policy as the Fed’s Beige Book which covered September and early October was released. A main change in this report was that bearishness crept in. The economy expanded at a slight to modest pace, which is pretty weak. Fed stated, “Business contacts mostly expect the economic expansion to continue; however, many lowered their outlooks for growth in the coming six to 12 months.” The outlook is weak because of the cyclical slowdown and the trade war.

Wells Fargo Missed EPS Estimates

It has been very rare this week for firms to miss EPS estimates, but Wells Fargo did so on Tuesday as it continues to be the laggard out of the big 4 US banks. Its stock likely increased on Tuesday because the curve steepened and the sector did well. The stock gave most of its Tuesday gains back on Wednesday. 

Specifically, the firm reported $1.07 in EPS which missed estimates by 8 cents. It reported $22.01 billion in revenues which beat estimates for $21.19 billion. Net income fell 23% from last year. And, net interest margin fell from 2.94% to 2.66%. It will fall further next quarter as the Fed is about to cut rates in 13 days.

Goldman Sachs Also Missed EPS Estimates

Goldman Sachs missed earnings estimates on Tuesday like Wells Fargo. However, its stock rose on Tuesday and Wednesday. The firm reported EPS of $4.79 which missed estimates by 2 cents. Revenues fell 6% to $8.32 billion which beat estimates by $10 million. 

Investing and lending division was hurt by Uber, Avantor, and Tradeweb which drove losses of $267 million. That division’s revenues fell 17% to $1.68 billion which missed estimates by $60 million. WeWork also hurt Goldman as the investment bank wrote down an $80 million loss. This wasn’t as bad as the publicly traded firms it lost money on and it wasn’t as bad as one estimate for a $264 million loss.

Apple Card was a huge boon for Goldman as the firm’s CEO stated it was “the most successful credit card launch ever.” It’s always great to partner with Apple as the firm is great at selling additional products to users. Apple has a better reputation than any of the banks which along with its software has helped drive usage even though it is working with a bank (Goldman) to launch the card. 

Marcus has also been widely successful even though the Fed’s rate cuts have lowered the interest rate that can be given to depositors. Marcus now has $55 billion in deposits and $5 billion in loans. 

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