Stocks Fall on Hawkish Fed - Big Tuesday Decline
Let's discuss Stocks Fall on Hawkish Fed. The stock market fell sharply on Tuesday. Partially because of the weak consumer confidence report. And partially because Bullard was less dovish.
It’s surprising stocks weren’t down more when you consider how high they are and how bad the news was. Specifically, S&P 500 fell 0.95%, Nasdaq fell 1.51%, and Russell 2000 fell 0.59%.
Small caps have underperformed in the past 8 months likely because the financials have a high weighting in that group. That sector doesn’t like Fed rate cuts.
VIX finally acted inversely to the S&P 500. It increased 6.68% to 16.28. We are closer to pessimistic sentiment than you’d think since the market is still near its record high.
CNN fear and greed index fell 6 points to 44 which is fear. Gold is now at a 6 year high. Fed is expected to cut rates. And there is great uncertainty related to the trade war and economic weakness.
Stocks Fall on Hawkish Fed - All Sectors Fall & 10/2 Curve Flattens
Stocks Fall on Hawkish Fed - Every sector fell except materials which were unchanged. Worst 2 sectors were technology and communication services which fell 1.84% and 1.6%.
These sectors are the most at risk to the trade war. I’m not confident there will be a trade deal soon. But I have no idea if President Trump will tweet something positively about the negotiations. Weak consumer confidence index might persuade Trump to be more open to rescinding some of his demands.
The 2 year yield was flat at 1.73% and the 10 year yield fell 3 basis points to 1.99%.
Investors got more bearish on economic growth.
Stocks Fall on Hawkish Fed - Traders didn’t buy the 2 year yield because of the relatively hawkish comments by Bullard. The difference between the two bonds is 26 basis points which is 17 basis points higher than this cycle’s trough.
If the Fed were to announce that it won’t cut rates this year, the 2 year yield would increase. It would probably get above the 10 year yield.
Finally, expectations for a 50 basis point cut in July fell dramatically because of Bullard’s comments. The chances fell from 42.6% to 29.2%. There’s still a 100% chance of a cut.
Stocks Fall on Hawkish Fed - Bullard Isn’t Dovish???
Bullard was the one Fed member who voted for a rate cut in June. He’s the most dovish member. Therefore, slightly hawkish comments by him are a big deal.
Bullard stated, “today I think 50bp would be overdone... I don’t think the situation really calls for that but I would be willing to go to 25bp... I hate to prejudge meetings – things can change by the time you get there – but if I was just going today that’s what I would do."
Heading into his statements, there was almost a 50% chance of a 50 basis point cut. The most dovish member saying there won’t be a 50 basis point cut pretty much takes it off the table. That is, unless he has changed his framework.
A 50 basis point cut would be the easiest way to cut rates 3 times this year.
Stocks Fall on Hawkish Fed - Cutting that much probably isn’t ideal because the Fed is starting its cut cycle with the lowest rates since the 1950s.
On the other hand, Powell made a dovish point when he stated, "Since then [May], the picture has changed. Crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy."
It’s very clear the Fed will cut rates at least by 25 basis points in July. He’s teeing up that cut with this statement. It’s fair to say the trade situation has gotten more uncertain since May. But the Fed has met since then (in June).
So by that logic there should have been a cut in June. The economic data has gotten worse. But there probably wouldn’t be rate cuts if it wasn’t for the trade war. Plus, the data is worse because of the trade war.
Stocks Fall on Hawkish Fed - Latest Update On Earnings
Stocks Fall on Hawkish Fed - The first 9 S&P 500 firms have reported Q2 earnings. Their EPS growth was 19.96% as they all beat estimates.
Furthermore, 8 beat sales estimates on 6.91% growth. Those are obviously fantastic numbers, but they won’t continue at that rate. Even if growth fell modestly, this would still be a good earnings season.
Earnings will start coming in more rapidly in the next couple weeks.
Relatively Solid Richmond Fed Manufacturing Report
Stocks Fall on Hawkish Fed - Empire Fed reading was a disaster. Dallas and Philly Fed indexes were a mixed bag, but had weak leading indexes. Richmond Fed manufacturing report was the best of the bunch as its index fell slightly from 5 to 3.
This is a composite index, so it’s arguable that it’s more useful than the others. This reading slightly missed estimates for 4. Sshipments index increased from 2 to 7 and the volume of new orders index increased from 0 to 1. Capex index increased from 16 to 21. Measurement of local business conditions also improved as it went from 2 to 8.
Just like the Dallas and Philly Fed indexes, this report had some weakness in the expectations results.
Stocks Fall on Hawkish Fed - It probably wasn’t as bad, but it’s hard to tell. There are only sub-components and no composite. 9 of the 11 components fell.
However, 2 of them that fell were inventories, so it’s not as bad as it sounds. Shipments fell 3 points to 24 and the volume of new orders index fell 1 point to 29.
As you can see from the chart below, expectations for local business conditions fell from 22 to 10. Which is the lowest reading in this series’ history. However, this series only started in 2011, so we don’t have any recessions to compare it to.
Finally, the capex expectations index fell from 36 to 25. These numbers don’t look too bad in relation to the other regional Fed indexes. That means the possibility of the ISM manufacturing PMI being above 50 increased.
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