A day after the Fed left rates unchanged and indicated a pause, investors sat down to their Thursday breakfasts looking at a
hefty helping of fresh earnings reports.
The results from the latest earnings tidal wave seem relatively mixed, and perhaps that’s reflected in the mixed tone of
pre-market trading. There might be a bit of a dichotomy in the major indices, at least judging from how things went ahead of the
opening bell. The Nasdaq (COMP) rose slightly, perhaps helped by a pre-market jump in Facebook (NASDAQ: FB) shares following that company’s solid earnings report, while the
S&P 500 (SPX) felt some pressure.
We’ll get to more earnings stuff in just a bit, but first a quick backward glance at what the central bank had to say.
The Fed didn’t just leave rates alone. It also removed the words, “further gradual increases” from its statement. The
subtraction of that phrase and Fed Chair Jerome Powell’s post-meeting press conference might have helped convince investors that
the Fed is serious about being patient, another word that appeared in the statement.
Overall, Powell and company look a lot more dovish than they did after their meeting in December. Markets reacted with a new
burst of rally speed late Wednesday, but by Thursday morning some of the excitement appeared to dissipate a bit. The mixed tone in
U.S. markets followed strength in Asia and a checkered performance out of Europe overnight.
Earnings Deluge Rolls Along
A slew of earnings reports hit the market between yesterday’s closing bell and this morning. There doesn’t seem to be any single
takeaway to describe them. Some of the major reporting companies achieved more than expected while others came up short.
If there’s a standout on the positive side, it’s arguably FB. Shares surged nearly 12% in pre-market trading after the company
easily beat third-party consensus earnings and revenue expectations. FB said daily active user growth climbed 9% in the quarter to
1.52 billion, while monthly active user growth also rose 9%. From a less bullish angle, the company did say it expects revenue
growth to slow. However, revenue rose at about a 30% clip in Q4, beating the company’s own guidance range.
The thing investors might want to consider with FB is how it follows up these positive numbers. It’s a great story and many
investors had left it for dead three months ago. On the other hand, we’ve seen good earnings from FB in the past followed by
trouble.
As FB shares shot higher, Microsoft Corporation (NASDAQ: MSFT) sagged slightly after the company missed analysts’ revenue estimates.
Revenue of $32.47 billion compared with the third-party consensus of $32.49 billion. It wasn’t necessarily all a disappointment,
however, as MSFT beat the consensus earnings per share estimate by a penny and saw cloud computing revenue rise 20%. Also, its
closely watched Azure cloud-computing platform had a second straight quarter of 76% growth.
Shares of Tesla Inc (NASDAQ: TSLA)
joined MSFT in the red zone early Thursday after the company reported earnings per share that fell well short of the Street’s
average estimate. Shares were down about 4% in pre-market trading.
Other major earnings reports in the spotlight today include DowDupont Inc (NYSE: DWDP) and General Electric Company (NYSE: GE). Shares of GE rose. Also, after the closing bell we’ll hear from
Amazon.com, Inc. (NASDAQ: AMZN). One
thing to consider looking at with AMZN, beyond their core business, is the performance of Amazon Web Services (AWS), the company’s
cloud-computing platform. Get your pencils and scorecards ready.
A “Solid,” Not “Strong” Economy, Fed Says
In its statement yesterday, the Fed called U.S. economic activity, “solid,” a change from “strong” in the December statement.
That might speak to the Fed detecting signs of slowing in the economy. It noted that its inflation gauges “have moved lower in
recent months.”
How do you define “solid” vs. “strong?” One thought is that solid means more consistent, but strong means, “we’re really rolling
along.” If strong is equivalent to a “five-star” rating, maybe solid is four stars.
The Fed said the labor market “continues to strengthen” and that “job gains have been strong, on average.” Household spending,
it said, “has continued to grow strongly.”. This all appeared to support contentions that the U.S. economy is still in good
shape.
For those still worried about prices rising, perhaps they’ll be soothed by the Fed saying that inflation pressures appear
“muted.” Tomorrow’s wage number in the payrolls report could still get a close look, however, for signs of any inflation
pick-up.
Yesterday’s rate decision probably wasn’t much of a surprise to most investors, considering the futures market had pegged
chances of a hike at just 1% going into the meeting. Fed Chair Powell and other Fed officials telegraphed pretty convincingly over
the last month that a pause might be in order, and not just for this one meeting, either.
Investors who got used to the Fed raising rates every quarter in 2018 might have to adjust to a little less excitement. Some
analysts are comparing this to the “pause” of 2016, when the Fed waited an entire year to raise rates after doing so in December
2015. It was seen at the time as sort of a test of how the economy would react to a slight tightening after years of rates being
essentially zero.
The Two Ps: Pause and Patience
After the December Fed meeting, the central bank’s language started to change toward a more dovish tone. Most Fed speakers over
the last month seem to be reading from the same hymnal, and the operative words arguably have been “pause” and “patience.” Those
were some of the takeaways from speeches earlier in January by Federal Reserve Bank of Dallas President Robert Kaplan and Kansas
City Fed President Esther George. According to Kaplan, it would be “wise to be patient” for the Fed, he told reporters. He said the
Fed should be thinking in terms of “months, not weeks.”
After yesterday’s Fed announcement, futures prices indicated chances for another hike at 1% for the March meeting, and less than
5% for the June meeting. The market pegs odds of rates rising before the end of 2019 at just around 4%. That’s quite a change from
where things were a few months ago, when many investors appeared to expect two rate hikes this year. Another thing that might be
worth noting: The market now projects nearly 12% chances of the Fed lowering rates by 25 basis points between now and the end of
the year.
In his press conference immediately after the decision, Powell said the case for raising rates has “weakened.” He added that
monetary policy is “appropriate” and in the range of the Federal Open Market Committee’s (FOMC) estimates of neutral. That would
mean rates at a level that neither would spark additional economic activity nor suppress growth.
The Fed’s recent more dovish vibe seemed to calm down the market a bit after the interest rate scare last fall when the 10-year
Treasury yield jumped above 3.2%. By early Thursday, it had fallen to 2.67% as worries about rate hikes ebbed. Market volatility
has also eased over the last few weeks. The VIX—the market’s most influential “fear indicator”—fell below 18 early Thursday after
topping 30 a month ago. It hasn’t gone much below 17 in recent months, so the question might be whether it can sustain these low
levels considering all the geopolitical tension.
Speaking of geopolitics, there were media reports early Thursday about the possibility of another meeting between the leaders of
China and the U.S. Their deadline for a trade deal is just a month away, with talks now taking place. There are also talks going on
at the U.S. Capitol as legislators face just about two weeks to come up with a deal to keep the government open.
Across the Atlantic, Brexit remains front and center. The deadline there is toward the end of March, and some media outlets are
talking about increased odds of a “No Deal” Brexit. British businesses are stockpiling products and delaying new investments, The
New York Times said today. Could that have negative long-term implications for the European economy? Only time will tell.
FIGURE 1: SEAS OF RED AND GREEN: After bottoming out in late December, the S&P 500 Index (SPX -
candlestick) began its march higher through the January Fed meeting. Meanwhile, the yield on 10-year Treasury notes (TNX - purple
line) bounced in early January and leveled off near 2.7%. Data sources: S&P Dow Jones Indices, Cboe Global Markets. Chart
source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee
future results.
Uncertainty Drives Gold, Also Underpins Dollar: Common wisdom around markets is that gold and dollar often have
an inverse relationship. When one rises, the other tends to fall. Well, gold has been on a tear since last September, but the
dollar shows no signs of packing it in. This could reflect all the geopolitical balls in the air that appear to be driving some
investors toward what they might see as “safer” investments, though no investment is ever truly safe. There’s Brexit, U.S./China
trade negotiations, a deadline in mid-February for another potential U.S. government shutdown, and turmoil in oil-producing
Venezuela. Typically, uncertainty tends to support gold prices. Since the end of September, gold is up about 10%, reaching $1,310
an ounce early Wednesday compared with below $1,200 back then.
Over that same period, the U.S. Dollar Index ($DXY) is essentially unchanged, still trading between 95 and 96. Brexit’s
potential impact on the pound might be a factor supporting the dollar despite gold market strength. One thing to consider watching,
however, is central bank policy. The Fed and other major central banks are sounding more dovish, so we’ll have to wait and see if
that starts to weigh more on the dollar, as looser monetary policy sometimes does.
Fed Lacks 20/20 Vision This Time: The Fed came to its decision today lacking information it normally would
have. That’s because the government shutdown, which ended last week, prevented release of some key data. These include Gross
Domestic Product (GDP) and December personal income and outlays, as well as a December trade report. The Fed typically keeps a
close eye on these numbers, so in effect, it was flying slightly blind this time out.
When Q1 GDP ultimately comes out this spring, it might be interesting to see if it reflects any impact from the shutdown. The
Congressional Budget Office (CBO) said this week that the shutdown cost the economy $11 billion, including a permanent $3 billion
loss. The CBO also projected economic growth will slow this year to 2.3%, compared with 3.1% last year, as benefits of the new tax
law begin to fade.
A Look Across the Pond: As investors ponder the next possible move by the Fed, some might look to Europe for
some additional insight. Earlier this month the rate on the German 10-yr Bund sank to its lowest level in nearly two years, and as
of today sits at a mere 0.188%. Recall that the German benchmark interest rate spent a chunk of 2016 on the negative side.
Though the European Central Bank (ECB) recently announced a phase-out of its $2.9 trillion bond-buying program, this week ECB
President Mario Draghi said the central bank “stands ready to adjust all of its instruments, as appropriate, to ensure that
inflation continues to move towards the governing council’s inflation aim.” With the latest eurozone inflation reading clocking in
at a less-than-robust 1.6%, and with the ECB having just pushed its next expected rate hike out to mid-2020 (from late 2019), it
seems the “pause-and-patience” approach is occurring on both sides of the Atlantic.
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