Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Everything’s All Right, Nothing to See Here; Please Disperse
That’s the message Police Squad’s Frank Drebin gave to a group of people who bore witness to a burning building full of fireworks. It’s a scene that Fed Chairman Powell reminded me of on Wednesday. He artfully ignored or dismissed all the obvious deterrents now impacting the US and/or global economy. The Fed’s message? It was, as expected, almost identical to the last – with perhaps one exception. The word “accommodative” was removed from the policy statement.
As significant as that was, the Fed glossed over it like everything else. Why? As I have said here before, they must raise or lower rates as the market now dictates. At this particular time in history, the trend in Treasury rates is up. Therefore the Fed must follow with its target rate or risk losing all credibility and/or control of the financial markets in their entirety. When so many economic indicators have either contracted and/or stagnated for the last several years, it’s reasonable to assume that rates are moving higher on the basis of cost-push dynamics rather than demand-pull, but for now the consensus is what it is.
At any rate, I believe Powell is relying on the combination of hurricane Florence and record corporate share-buybacks to extend the “everything is fine” thesis for just a few more months. After that, I think he will be faced with the real challenge of explaining why rates remain relatively high in the face of what should be deteriorating economic and/or financial conditions. And I really don’t believe I’m off my rocker to say so, since a similar theme is currently unfolding across most parts of the world (even in Germany).
Turning to the data, there were a few upticks to speak of, mostly among opinion polls and other confidence-centered indicators. Such emotionally based highs usually occur before an economic decline, so that is no real surprise. Aside from that, the Florence effect has yet to really hit the data (assuming it will), at least consistently, as New Home Sales (August) formed another lower high on the chart. That statistic is now off 11.6% from the peak in November 2017. Pending Home Sales (August) were also a bit weaker – off by 1.8%. Durable Goods orders (August) registered decent growth at 4.5%, but excluding transportation and defense (i.e., government spending), orders fell 0.5%. Inventories (August) at the Wholesale and Retail levels advanced at much greater than expected rates of 0.8% and 0.7% respectively. And the Richmond Fed manufacturing index (September) rose from 24 to 29, a 25-year high – owing, I believe, to hurricane Florence.
Stocks of course took the Fed’s claim that “inflation is low and stable” and ran with it in Thursday’s trade. The indices all enjoyed a little bounce, which favored tech stocks more than those in the Dow. Treasuries, on the other hand, seemed to ignore the statement, and were surprisingly flat across the curve – this while key European debt continued to slide. Away from that, the dollar followed the stocks’ lead and rallied to a short-term resistance level of 94.89, while oil and other commodities such as gold declined to near-term support levels. All in all, I believe this was a time when the Fed was half expected to say something truthful about current financial conditions, but didn’t. This obviously caused some sharp unwinds to take place, which will likely be a short-lived phenomenon if Thursday’s fading rally isany indication.
Box scores will be posted at the usual time tomorrow.
VP Investment Management