Market Brief – Thursday 1/10/19

US investors remained undeterred about the negative economic data coming out as they believe once the government shutdown ends and the trade ward ends, the economy and the stock market will resume their ascent. If not, investors now believe the Fed has put a floor under the stock market, allowing them to resume investing in risk assets without concern.

The recent Fed minutes showed that half of the board members did not want to hike the Federal Funds rate in December, even though they all did vote for the rate hike. It’s important to understand the Fed is making it clear they will defend the value of the dollar over “printing” more money to bail out the stock market. Today Fed Chair Powell is expected to speak, which should add some clarity to the situation, along with the release of the Fed’s balance sheet, which will show if they eased after Christmas or not.

Following in Germany’s footsteps, France’s industrial production fell -1.3% month-over-month and is now posting a -2.1% YoY loss. With two of the largest economies in the European Union struggling as the European Central Bank stops their Quantitative Easing program, it is becoming clear the EU is headed towards a recession.

Jaguar-Land Rover announced they will lay off up to 5,000 UK workers, which was followed by Ford Europe who said they will also lay off workers and may close factories. Macy’s and Kohl’s announced weaker-than-expected holiday sales which sent the price of retail stocks tumbling. Retailers built up inventory during the third quarter and are now having trouble moving it.

China’s Producer Price Index fell, indicating deflation is starting to move its way through the global supply chain, just as the Fed and other central banks remove their monetary support. A decelerating money supply always leads to disinflation or deflation.

The good news is that unemployment claims were below expectations, but with half of the furloughed Federal workers eligible for unemployment benefits, expect this number to jump next week.

Fed Chair Jerome Powell spoke today at the Economic Club of Washington D.C. where he remained patient on rate hikes but said he would like to see the Fed’s balance sheet much lower. When asked how much lower, he indicated it would be higher than it was in the past, but the exact level is unknown. The stock market reacted negatively, then investors decided it was a Bullish signal, even though the balance sheet unwind is contributing towards lower asset prices.

Tighter monetary policy in any form, along with a decelerating money supply, always leads to lower long-term bond yields. Today’s 30-year Treasury auction saw a surprise drop in foreign bidders, who took 57.3% of the offering, which is below their six-month average of 62.6%. Direct bidders took 15.9% and dealers got 26.7%. The drop in foreign demand could be from the increase in domestic demand. Yields traded higher after the auction.

Impressively, investors have shrugged off all bad news and bid stocks higher with the goal of 2,600 on the S&P 500 within four points from today’s close. With European economic data contracting, corporate forward guidance disappointing, the Fed tightening, the trade war continuing, and the government shut down, you wouldn’t know any of those things by watching the stock market.

Based on the latest data from the Federal Reserve, they did not juice the stock market after Christmas by adding to their balance sheet. Regardless of what Chair Powell and the other members of the Fed are saying, the balance sheet unwind program is still running at $50 billion per month.