US equity markets started higher as Boeing smashed earnings expectations, which sent their stock back near its all-time highs. Today the Federal Open Market Committee (FOMC) announces their monetary policy guidance, so any early moves in stocks should be ignored until after the press release at 11 a.m. PST.
The stock market is expecting the Fed to announce an end or a taper of their balance sheet unwinding program, but I find it highly unlikely there will be much, if any, change in the Fed’s policy path from December.
Pending home sales fell -2.2% MoM in December, which add to a twelve-month consecutive decline in annual home sales. On a year-over-year basis, pending home sales are at their 2014 lows.
Oil Bulls breathed a sigh of relief as the EIA reported inventory levels as Crude: 0.919M Cushing: -0.145M Gasoline: -2.235M Distillates: -1.122M. Oil investors are hoping these weak numbers will lead to production cuts and higher oil prices. Since oil prices are a function of the Monetary Base, which is declining as the Fed tightens, lower oil prices are on the horizon, not higher oil prices. Oil traded higher after the report.
ADP employment posted a +213k jobs in January versus expectations of a +181k print, which shows employers are still hiring despite weak fourth-quarter sales data.
The Fed didn’t make any changes to their monetary policy plans, although the stock market is interpreting this as dovish. In terms of inflation, the Fed sees inflation near their 2% target even though market-based measures of inflation have fallen in the past couple of months. The FOMC voted unanimously to keep the Federal Funds rate between 2.25-2.50% and to continue unwinding their balance sheet at $50 billion per month, with a cap of $30 billion in U.S. Treasury bonds and $20 billion in Mortgage-Backed Securities.
The stock market saw what it wanted to hear, which was the Fed could back off on their balance sheet normalization. Based on the text below, from today’s press release, there is no indication the Fed is going to stop. They simply reiterated what they have been saying, is that if conditions warrant a change in monetary policy, they are prepared to lower the Federal Funds rate and halt the balance sheet unwind. Nowhere does it state that if the stock market continues to fall that there will be a change in policy.
“The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
Stocks rallied and Treasury yields fell following the press release. Investors should be aware that Quantitive Easing was intended to create a wealth effect by boosting asset prices, so the opposite, which is the continued unwinding of their balance sheet, should cause asset prices, and interest rates, to fall.
Chair Powell’s press conference really shed some light on the bigger picture. He remarked that the Fed’s change in view since their December meeting was due to the tightening of financial conditions in the fourth quarter. Be aware, the Fed uses lagging data, so they didn’t see it when they voted to raise the Federal Funds rate in December.
Most of the blame for the slowdown was aimed at the government shutdown, which Powell believes will filter its way out of the data by the second quarter unless there is another lengthy shutdown.
While Powell did not see any signs of a recession looming, he was clear that the Federal Funds rate is the primary policy tool of the Fed. The balance sheet unwind is a secondary tool and one they hope they don’t have to use again in the future. When asked, Powell said they would consider increasing the balance sheet only after the Federal Funds rate was back at zero.
As far as monetary policy goes, the Powell believes the policy stance is appropriate and that we are at the lower end of the neutral rate. The neutral rate is the interest rate level that is not too high, nor too low.
When asked about the balance sheet unwind, Powell felt they were clear from the onset about how the balance sheet would be unwound. He further commented that the market, or Wall Street, is asking for further clarification, so the Fed plans to provide more clarity in the future. It was never the plan for the Fed to have two tools of policy running simultaneously, so for the moment, without any further Federal Funds rate hikes on the horizon, we only have one.
While nearly everything traded higher today – stocks, bond, and commodities, crude oil is trading at the top end of a resistance band while Treasury yields closed below 2.7% and above their resistance band. Neither crude oil or the bond market is confirming the move higher in the stock market, suggesting stocks are about to face a near-term reversal.