To begin the week, treasury yields rebounded off previous weakness. While the news out of the PBOC over the weekend was to announce changes to the interest rate policy viewed as stimulative. This was a much anticipated week due to the Jackson Hole that came out of Friday, the central bank speakers eyed a more aggressive dovish tone which would pave the way for more rate cuts. As you will see shortly that was not entirely the case.
Asia and Europe were not out of the woods as the speculation of more stimulus flooding into the overseas markets. Trade tensions at the beginning of the week were mellowed which allowed the US Commerce Dept to confirm granting Huawei an extra 3 months of an extension to the license that lets the company contact and do business with US customers.
This was short-lived as Trump came out to end the week on some rather aggressive trade news. In the morning, pre-market, China announced to levy 5-10% retaliatory tariffs on $75B of US goods effective on Sept 1st and Dec 15th.
That’s not it, Trump got aggressive after the Jackson Hole did not deliver what he wanted. This was not even a part of the Jackson Hole, Trump said he promises to respond to China tariffs on Friday Afternoon. He then ordered American companies to immediately start looking for an alternative to China. Effectively, no trade deal with China. Blacklisting everything from China. Trump took this in his own hands, his own Administration did not even warrant this! They don’t know what’s going on!
Trump mentioned that he doesn’t know who the bigger enemy is, Powell or Xi.
July Meeting Minutes came out on Wednesday and there were many dissenters within the Fed sparking some concern in the markets. However, there was not a lot of movement throughout the day. The July rate cut was seen as a “mid-cycle adjustment” by a lot of the members, the two dissenters were hawks, while two members wanted to hold rates and two wanted a 50 bps cut!
Thursday, the Jackson Hole Symposium began and two hawkish members were set to take flight on the first day to talk about monetary policy. They were not as hawkish as lead onto the belief and then Powell came in on Friday to finish it all off.
Powell’s announcement on Friday led us on to believe that there would be more rate cuts in the future. Powell mentioned that inflation is low and that the Fed is looking to act appropriately to keep the expansion sustained. He also mentioned that China and trade tensions were not to be considered in their monetary policy adjustments. However inflowing risks would prompt the Fed to act accordingly.
Monday US 2-10 year moved back to positive by 5.5 bps, the peak of the week was 9.0bps, and into Friday we moved back into negative territory.
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 down 3.72%
- Technology down 2.92%
- Financials down 2.49%
- Retail down 1.96%
- Utilities down 0.42%
Overview of key markets last week (bottom chart):
- Crude oil down 3.01%
- S&P500 down 2.41%
- Silver was up 3.43%
- Gold up 2.24%
- US dollar down 0.95%
The Federal Reserve is not just in a mid-cycle adjustment
This past Wednesday we experienced the FOMC meeting minutes from the July rate cut. This was an important report as we had a good look at the Fed’s internal blueprint. What we saw surprised us. The Fed is not agreeing with one another. There were hawk dissenters, Fed members that wanted a 50 bps cut and Fed members that did not want rates to change at all!
Not to mention, Trump is extremely upset with the Fed and wants them to act quickly, he also wants a 100 bps cut cumulatively. Which has led us to believe that rate cuts are coming in September, October, and December?
At this rate, the Fed Funds Rate would be between 125-150 basis point by the end of the year… Meanwhile the “neutral rate” that was talked about time and time again as the Fed cut rates was supposed to be a lot higher than the current 200-225 basis point Fed Funds Rate we currently have.
So if the neutral rate was estimated to be 300-375 basis points, based on the official inflation in the US, which is about 3.00%, the Fed could not even get to the breakeven point for the official inflation rate of 3%. If it did, that means that the Fed Funds rate would have to have been at least 5-6% and mortgages would be 7%. Clearly not the case.
If the Fed continued to hike, the market would not have taken that much of a beating, if anything have regulated themselves which also gives the Fed more ammo to cut should we hit recessionary levels. The Fed could not have been the only central bank hiking in a storm of central bank cuts throughout the world.
Negative rates exist in Europe, all the other central banks are screaming fear and doom. The Fed is left with 200 measly basis points to work with if they don’t want to go the way of negative interest rates.
During the Jackson Hole symposium this week, Powell said some very interesting things. This was a much-anticipated event and all were on him. Even though Trump clearly overshadowed the whole situation. Fed Chair Powell said that with ongoing risk, and low inflation the Fed could have to act justly to ensure economic expansion. In other words, we could see further rate cuts.
While Trump was quick to react with no real support from his Administration, saying that Powell is clearly not helping the US out and he doesn’t know who is enemy number 1. Powell or Xi.
Continuing on to blacklist all of China. Massive downside opened up on equities as the ES futures market dropped on Trumps news and 2-10-year yields dropped below negative territory. The downside in the ES futures moved price down into the 2860 level.
Take a look at the 2-10year yields below.
Options Trade of the Week
-Long Put strike at 150
-Short Put at 140-145 (skip this step if outright bearish)
-Stop above $152
Weekly Economic Calendar
The last week of August is here, the Jackson Hole Symposium is over and the FOMC has passed. It is the last week before the institutional money and volume flood the markets again so we could be in for a slower week. We do not have much on the high impact economic front either.
Sunday, G7 meeting begins.
Monday, Core Durable Goods Orders out of the US. G7 Meeting continues.
Tuesday, CB Consumer Confidence out of the US.
Wednesday, ANZ business confidence out of New Zealand, private capital expenditure out of Australia.
Thursday, news continues out of Australia and the US. Prelim GDP numbers out of the US which will be interesting considering the recent economic events and talk of recession. Building approvals out of Australia.
Friday, to end the month we have Canadian GDP numbers and Chinese Manufacturing PMI.
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