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Market Brief – Wednesday 7/10/19

The S&P 500 reached a new all-time high in early trading as Fed Chair Powell proved in his testimony to the House that markets only care about easy central bank policies. Investors are not concerned about earnings or profits as long as central bankers are willing to inject currency into the economy. Stocks and gold rose, while bonds sold off as markets interpreted Powell’s prepared speech to mean that the Fed will cut rates at its July 31st meeting.

The initial response from the markets is incorrect. When the Fed starts to ease while in the midst of a tightening cycle, as the Fed is still unwinding $35 billion from its balance sheet, it is a bearish signal. Gold is looking for inflation, but a cut to the Federal Funds rate will not stoke inflation. Treasury bonds sold off in early trading, but this too is the wrong move, as the Fed is signaling that the economy is weaker than most realize. Stocks and gold began to pare their early gains and Treasury bonds found buyers following the early-morning ramp.

The EIA reported crude oil inventories as Crude: -9.50mm (-2.5mm expected), Cushing: -310k, Gasoline: -1.46mm, and Distillates +3.729mm. Crude oil prices were flat following the report.

Today’s $24 billion 10-year Treasury auction saw decent demand with foreign bidders taking 60.8% of the auction and domestic bidders taking 12.9% of the auction, which left securities dealers with 26.4% of the auction. Yields rose slightly after the auction, even though bidding was right around its six-month average.

The Federal Open Market Committee (FOMC) released the minutes from their June meeting as investors eagerly hoped to see strong signs of a rate cut in their upcoming meetings. While several members thought a rate cut was necessary, a few didn’t agree, and one thought a cut at this point would only lead to more asset bubbles. The Fed indicated they will remain data dependent and don’t appear to be in a rush to make any policy changes. The probabilities of a small rate cut are increasing, but this week’s CPI and PPI data should be a strong indicator of the Fed’s next move.

Stocks gave back some of their early gains but managed to close slightly higher, while Treasury bonds fought back against some of their early losses. Physical gold traded higher in anticipation that tomorrow’s CPI data will show a large increase in consumer prices. Agricultural commodities continue to trade in a tight range and crude oil managed to close over $60 per barrel for the first time since May.