Market Brief – Wednesday 11/28/18

Stocks leaped higher as global stocks moved higher on hope the U.S.-Chinese trade war will soon be resolved and that the Fed will turn dovish. After the API reported higher crude inventories, investors were hoping the government data would show a much smaller build. They were wrong.

According to the Department of Energy, crude inventories rose +3.58M barrels, Cushing +1.177M, gasoline -764k and distillates +2.61M. Oil prices fell following the report.

New home sales were down -8.9% MoM, the biggest drop since 2011. Supply is now at 7.4 months. Clearly, the housing market is not able to absorb higher interest rates.

Third quarter GDP revision showed that out of the 3.5% growth number, 2.7% can be attributed to government spending and inventory building, leaving consumers with a mere 0.8% of the final number.

The computer algorithms loved Jerome Powell’s speech, as they shot stocks higher, Treasury yields lower and the dollar lower on comments by the Fed Chair that we are much closer to the neutral rate than previously thought. This means the Fed may stop raising rates soon, but there was no indication the Fed would halt its balance sheet unwind.

Wall Street took the most optimistic view of Fed Chairman Powell’s speech today and drove all of the major equity indices higher. Trading volume on the major equity indices did not indicate a move in by large investors, as volumes were slightly higher than their recent average. Treasury yields held flat.

Powell said the Fed was close to the “neutral” rate or, the rate at which they will stop hiking. The Fed Funds rate is at 2-2.25% and the neutral rate, based on prior Fed minutes, is between 2.5-3.5%. The market decided today that the Fed will hike one more time and stop. The damage from the rate hikes is done, and stopping after the next hike, won’t change much.

Today’s 7-year Treasury auction saw strong demand from both domestic and foreign bidders, which is a sign that the ‘Smart Money’ is continuing to rotate into bonds.