Massive Volatility In Fed Expectations

Massive Volatility - Stocks Reverse Course On Rate Cut Hopes

With expectations of Massive Volatility, the Fed funds futures market moved towards expecting 2 rate cuts in July. This happened on Thursday which pushed the market higher. Especially and even after Netflix and CSX’s poor earnings reports.

In this article, I will review Microsoft and Morgan Stanley’s results. First let’s briefly review the day’s wild action. S&P 500 was up 0.36%, Nasdaq increased 0.27%, and Russell 2000 increased 0.31%.

That looks normal. However, there was a turnaround mid-day after Clarida and Williams spoke. S&P 500 increased 0.72% from its low. It looked like the market was bound for another slightly down day before those Fed members spoke.

Clarida & Williams Were Very Dovish

Massive Volatility - Clarida and Williams made their last statements before the blackout window starts where Fed members can’t make statements. That means these dovish statements can’t be taken back. Although, the NY Fed may have tried to.

Fed vice chair Clarida stated, “We’ve had mixed data, but I do think the global data has been disappointing on the downside. Disinflationary pressures, if anything, are more intense than I thought six weeks ago. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”

Massive Volatility - Fed is making decisions based on global economic reports and trade war worries.

Since Clarida thinks the global economy has gotten worse, he has gotten more dovish. This pushed up the odds of a 2nd rate cut at the next meeting.

NY John Williams stated, “It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first signs of economic distress.”

After John Williams spoke and took questions, the NY Fed stated, “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”

That was very weird because it implies the Fed doesn’t fully stand by what he stated. Technically, it was an academic speech. But he gave guidance on future policy. NY Fed didn’t like how far the market took it.

Market Goes Wild On Clarida & Williams’ Statements

Massive Volatility - To be fair to the market, I can’t see any other way of taking those statements. They were very dovish and imply a 50 basis point cut. Resulting from their statements, the Fed funds futures market went berserk.

As you can see from the chart below, at one point the odds of a 50 basis point cut hit 70%. On late Thursday evening, the odds of a 50 basis point cut fell back to 46.2%. Possibly because of the NY Fed’s statement. That still means cuts are in play. 70% odds mean they are virtually guaranteed to occur. This Fed meeting will be very interesting just like today’s action.

Massive Volatility - It’s no surprise the short end of the yield curve rallied hard and then gave back some of those gains.

2 year yield fell 5 basis points to 1.76%. On Friday morning, it increased about 3 basis points. 10 year yield fell 3 basis points and then gained 2 back on Friday morning.

This action was like the beginning of the yield curve steepening that occurs during recessions. We aren’t in a recession, but the Fed is acting like we are near one.

July Fed meeting could be one of the most interesting meetings ever. Just when I thought I knew what the Fed was going to say, we were dealt a dovish curve ball.

Morgan Stanley Beats Estimates

Massive Volatility - All of the major banks/investment banks have beaten EPS estimates (Citigroup, Wells Fargo, Goldman Sachs, Bank of America, Morgan Stanley, and JP Morgan).

Now let’s review the results from Morgan Stanley which saw its stock rise 1.51% as a result of its solid quarter. Morgan Stanley reported Q2 EPS of $1.23 which beat estimates by 9 cents.

Revenues of $10.24 billion beat estimates by $250 million. Its wealth management business had $4.41 billion in revenues which beat estimates by $60 million. The firm will be hurt by Fed rate cuts, but not as much as its competitors.

Microsoft Reports Another Great Quarter

Massive Volatility - Heading into this quarter, Microsoft stock had rallied on 17 of the previous 23 earnings reaction days. It is about to be 18 out of 24 because the firm beat on both the top and bottom line. Its stock rose 2.66% after hours.

The company reported $1.37 in EPS which beat estimates by 16 cents. It reported $33.72 billion in revenues which beat estimates of $32.77 billion. Revenues were up 12% which is the company’s 9th straight quarter of double digit revenue growth.

The chart below shows the company’s results by each product/service. As you can see, Azure’s yearly growth fell from 73% to 64% which is its lowest rate in 4 years.

Massive Volatility - It’s impossible to grow at such a high rate forever, so this is far from a disaster.

However, growth was expected to be 68%, so it was a slight disappointment. Microsoft’s Commercial Cloud business grew 39% to $11 billion.

Intelligent Cloud segment had $11.39 billion in revenues which beat estimates for $11.02 billion. Both include Azure. To be clear, Commercial Cloud includes Dynamics 365 and Office 365. Intelligent Cloud includes Windows Server, SQL Server, Visual Studio, and GitHub.

More Personal Computing segment (including Bing, Xbox, Surface, and Windows) had $11.28 billion in revenues.

Massive Volatility - That beat estimates for $10.99 billion even though the gaming product segment had a 10% drop in revenues. Productivity and Businesses segment had $11.05 billion in revenues. It beat estimates for $10.7 billion.

This segment includes Office, Dynamics, and LinkedIn. IDC PC shipment data implies PC sales growth will be 4.7% because increased Intel ship supplies.

As you can see, Microsoft’s revenues in each segment beat estimates. This supports the stock’s amazing 35.01% year to date gain.

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