Powell saves equities? The Fed is the real market driver.

The first of 2019 is over, and it did not start well. There was still some remanence of the end of 2018 in 2019. The beginning of the week showed weakness due to selling from worries of global economic growth in the coming year.

News out of China, a key PMI reading fell hard into contraction territory while the rest of the world continued to soften data. All of this while the US government continued their burst of a partial shutdown, with little hope of going back to work.

Huge bursts in volatility struck different markets this week. Currency markets experienced an explosion on Apple news. Apple announced an expected drop in quarterly sales which sparked fear of an everlasting trade war. The Japanese Yen exploded higher, only to come down afterwards to continue its recent bull run. This highlights how global liquidity conditions maybe exacerbating capital market swings in the wake of central banks attempts to wean off of unconventional measures, namely quantitative easing.

The ISM reading fell harshly out of the US, the most since October 2008, a significant date. Which helped the equity downside prevail earlier in the week. Yield also dropped on this news, this was reminiscent of the first time the Fed funds rate traded above the 2-year ever so slightly. Ultimately leading to the rate cuts by the end of the year.

The downside looked super prominent all week, until Friday, when the equity buyers stepped in. There were many drivers that helped the upside. The first was the PBOC added to China’s economy in the wake of next weeks trade talks with the US. This was done by cutting the RRR or Reserve Requirement Ratio by a percentage point which drove liquidity into the economy.

Friday morning also was host to a huge addition to US job numbers, a slight positive wage growth and a slightly increased unemployment rate. The good news however heavily outweighed the increase in unemployment.

The last good piece of news that helped markets rally on Friday was the meeting with Fed Chair Powell. Who noticed the jump in wages, and bolstered economic growth rather than focusing on inflation. He then proceeded to talk about the balance sheet run off and was not completely dissmissive of the modification of the balance sheet. He mentioned that the Fed would continue to monitor data and rate deceision with a slight hint of a potential rate cut. Maybe around the Fed Put?

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks up 3.87%
  • Technology down 0.92%
  • Financials up 1.47%
  • Retail up 2.72%
  • Utilities up 0.34%

Overview of key markets last week (bottom chart):

  • Crude oil up 6.78%
  • S&P500 up 1.76%
  • Silver was  up 2.14%
  • Gold up 0.28%
  • US dollar down 0.16%

The Fed controls markets!

The Federal reserve has been at the center of news in recent months, from being praised by some to being bashed by most! However, which of these is warranted? The bashing or the praising?

There is evidence that suggests that US equities are not able to sustain any natural growth with the Fed intervention…
Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. “

The Fed (and other central banks) has been the main contributor to market revival after each major correction that has occurred. We saw it in 2009 to an extreme level. And also in 2016-2017, when we saw the biggest global central bank intervention. Where the BOJ, ECB and FOMC pressed $15 trillion into the balance sheet. Is it a coincidence that the balance sheet peaked when markets did in early January?

Once the Fed removed “accomodative” from their monetary policy language, the quantitative tightening became a reality. Causing markets to slip, not to mention the addition of tax cuts, trade wars and global growth taking a hit.

Central banks across the world were artificially inflating markets with added “liquidity”, however we saw the real downturn in global markets when the ECB “discontinued” its quantitative easing and took on a somewhat hawkish tone. We’re still waiting for that rate hike we were promised by Draghi by the way.

We hear Powell and the Fed saying that the markets are not their main concern and that the Fed moves according to economic data. However, the market is a leading economic indicator. If the market rises, the economy is great. If the market falls… well the economy is not doing so well. Why doesn’t the Fed hike during huge market corrections then?

When we see markets enter correction or bear market we don’t see balance sheet reduction or rate hikes.

Market sensitivity is at highs here, the global markets react to any news, recently we saw weak Chinese data hit global markets and helped the S&P 500 drop lower overnight and throughout the session. Do not miss central bank data! When the 2350 level was hit on the S&P 500 we saw a sharp rebound, that was the proposed Fed Put level. Where the Fed would come in to save markets, so do not be surprised if we see a sharp rebound around that level again or at a new low.

Not to mention that we recently heard of the Fed ceasing with the proposed 2019 rate hikes, could there be a rate cut in the coming year. With government debt rising by about $2 trillion in the first two years of Trumps term, an economic downturn looks imminent.

Weekly Economic Calendar

The following week has a lot of high impact economic news, the holiday season is finally over. The markets will no longer have to push events to the following days and the economic calendar has really shown it through the cluttered week ahead. 

Monday, ISM data, this was a big event last week so everyone should watch this number release carefully.  

Tuesday, Trade balance data out of Canada premarket. 

Wednesday, this day is filled with a lot of economic news starting with BOC data out of Canada. An expected rate change is set to come out at 10:00 am EST. BOE Gov Carney then does on the wire, watch the GBP. FInally FOMC meeting minutes, this is an afternoon event that all traders should watch. 

Thursday, Fed Chair Powell speaks, another important event to watch carefully. Retail sales then come out of Australia. 

Friday, The week ends on data out of the UK overnight and CPI data out of the US all premarket.  

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