Jay Seals the Deal – Lower for Longer
So FED Chair Jay Powell just sealed the deal… in the moments before the opening bell rang on 11 Wall Street – Powell took to the virtual stage and laid out plans for a ‘new’ FED plan… CNBC ran with the first headline…
“Powell Announces New Fed Approach to Inflation that Could Keep Rates Lower for Longer”
And the operative words? Lower for Longer!
Essentially – they are going to let inflation to ‘run longer’ than they would have… while they have targeted a 2% rate as the key level that would signal the need to raise rates – they are now abandoning that mandate and have chosen to allow inflation to run above that level in order to promote fuller employment.
In fact, the language change was subtle calling for:
“assessments of the shortfalls of employment from its maximum level vs. saying deviations from its maximum level”
While it seems relatively minor – it suggests (or so we are told) that a robust job market can be achieved without causing runaway inflation. Ok – so here we go…
And stocks rallied, the dollar fell, gold rallied then fell, short term bonds fell forcing yields up steepening the yield curve as investors must now position themselves for higher long-term inflation expectations and that is good for financials – which ended up being the best performing group yesterday… the XLF (Financial ETF) rose 1.7% with names like JPM rising 3.2%, BAC +1.9%, C +1.7%, GS + 1.4% and MS rising 1.7%.
By the end of the day the Dow added 160 pts, the S&P added 5 pts, the Nasdaq fell by 40 pts and the Russell gained 4 pts. Now – that is interesting that the Nasdaq fell – but the sense is that investors took this opportunity ring the cash register and take some money out of that sector – as this move was expected – the FED has been hinting at it for a month or so… maybe longer – so investors did a bit of re-arranging… Not huge – and nothing really dramatic… because in the end – this new policy will force more money to go into riskier assets as investors seek out higher returns.
Also in the news was WMT joining forces with MSFT in a bid for TikTok’s US operations and that sent WMT shares up 4.5% and MSFT shares up 2.5%. Abbot Labs rose 8% after they received emergency use authorization for its rapid response virus antigen test. And while yesterday’s macro data was in line with the expectations it doesn’t remove the need for Washington to do something more… and the longer this stalemate between Nancy & Chucky and the GOP goes on the more the pressure will increase to get something done… especially as the election draws nearer…
The RNC ended their convention on the South Lawn of the WH with Ivanka introducing Donald to the crowd of 1500 that gathered on the lawn… with Trump assailing Biden and the DEMS of serving as ‘the trojan horse for socialism’ highlighting taxes, crime, regulations, and the virus all as reasons to vote for Donald on November 3rd re-iterating his new tagline – “Promises made, Promises kept!”
So now – let the fight begin… as the markets prepare for what will be the most contentious presidential election yet… and that can be seen in the interest rates markets as ‘implied volatility’ is higher than it was in both the 2012 and 2016 elections and the currency markets – the 3 month implied volatility for the dollar/yen pair has risen by the most in 20 years… and the VIX – which represents volatility in the stock market is slowly beginning to creep higher as well… and is sure to surge once the rhetoric gets even uglier… and when that happens stock prices usually retreat – the question now is – how far will they or can they fall?
Global markets have shown mixed reactions… news out of Japan that PM Shinzo Abe is resigning due to health concerns has now ended his long running tenure and that sent the Nikkei tumbling by 1.4%.
European markets are mixed as investors there react to the FED’s latest announcement along with assorted macro data points. France announces that 2Q GDP came in at -13.8% (not unexpected) while Spain reports a drop in retail sales for July… and in Italy – the ECB gave the green light to banking giant – Monte dei Paschi to clean up the file full of bad loans – and that sent that stock up 3%. In mid-morning trading – the FTSE +0.17%, CAC 40 -0.34%, DAX -0.33%, EUROSTOXX -0.25%, SPAIN +0.3% and ITALY +0.22%.
US futures are mostly higher… with the Dow up 94 pts, the S&P up 7 pts, the Nasdaq down 21 pts and the Russell up 7 pts. If the Dow holds right here, then it too will have erased all of the losses suffered in the February/March debacle. Expect the chatter today to be around more of the latest FED news, Trumps acceptance speech and all of the fact checking that is sure to go on and some more US macro data reports.
Eco data today includes: Personal Income and Personal Spending – exp of -0.3% and +1.6% respectively. And the U of Michigan consumer sentiment report of 72.8.
Gold which traded down to trendline support at $1903 over the past couple of days – is now up and back trading at $1960/oz… as investors try to decipher what the latest move by the FED will really mean… Remember – that gold is an inflation hedge – so does the recent rally suggest that gold investors are quietly building a stockpile… that being said – I suspect gold will remain in the $1900/$2000 range thru the fall… and may see additional interest when the election rhetoric gets even uglier.
Expect today and next week to be quiet as the country prepares to celebrate Labor Day. I am on vacation next week – so most likely – my next note will be on Tuesday September 8th unless something really dramatic happens.
This morning the S&P is at 3484 now only 16 pts away from the next century mark – 3500. Again, we are in new unchartered territory… trendlines will help to determine levels of resistance – if there are any at all… valuations are stretched for some sectors and we are seeing money being raised from many of the Go-Go growth names… and moved into some value names. If you are invested in the market – Bravo… you are participating in this latest surge and if you want to put more money to work – I would offer a word of caution as we move into the fall… I wouldn’t necessarily go chasing names here – September/October are volatile months… sit tight, do your homework and be patient.
Take good care –
Sliced Rib-Eye w/Arugula & Grana Padano
There are only a couple of ingredients… Thin sliced rib eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.
Just FYI – Grana Padano – is one of the most popular cheeses in Italy. It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.
Season your rib-eye with s&p and massage with a touch of olive oil… allow to rest at room temp for 15 or 20 mins.
Heat your grill – Place the rib-eye on the grill and sear for 3 mins and then flip over and cook for another 3 to 5 mins – depending on thickness –
Now slice it at an angle and fan it out on your plate. Place the fresh arugula, chopped red onion (optional) and slices of the Grana Padano in the center so it looks pretty. Serve immediately with a house Chianti. There is no dressing on the arugula – this dish is about simplicity.