There’s likely going to be a hunt for direction this morning as investors await the Fed’s latest verdict on the economy and its
thoughts on the future direction of interest rates.
It wouldn’t be all that surprising to see some slow trade ahead of the Fed meeting. Things are often a little dull on Fed days,
though there’s really not too much drama associated with the Fed’s decision today the way there was at the December meeting. That
was the last time the Fed raised rates, but since then it’s adopted a dovish pose. Chances of a rate move this afternoon are near
zero, according to the futures market. More on the central bank below.
While the Fed might be in focus today, it’s also important not to forget about the trade situation. As a reminder of its
importance, consider the earnings report from FedEx Corporation (NYSE: FDX) after yesterday’s close. The company’s shares fell more than 6% in pre-market
trading this morning after FDX missed Wall Street’s earnings and revenue projections. FDX also lowered guidance. What was one
factor behind the miss? As the company said in its earnings release, “Slowing international macroeconomic conditions and
weaker global trade growth trends continue.”
That sounds like a pretty solid reason to hope for some sort of trade resolution, and not just with China. Remember, the U.S.
also has trade issues with Europe, and Congress hasn’t approved last year’s revised trade agreement with Canada and Mexico. All
this helps create uncertainty for companies like FDX.
Media reports today suggest that the U.S. and China will continue negotiations next week.
Overseas, the Brexit situation remains a bit confusing. There were reports early today that Prime Minister Theresa May will ask
for a three-month delay. That would push the March 29 deadline back until late June, but the idea needs E.U. approval. Overseas
stocks were mixed early Wednesday, and crude oil took a step back after approaching $60 a barrel yesterday. It’s still near
four-month highs.
Will Fed See Things the Market’s Way?
There appears to be a dichotomy going into today’s Fed decision and its release of an updated “dot plot” showing where Fed
officials think rates might go in coming years. The last dot plot showed the Fed still penciling in rising rates, but investors now
see rates likely falling over the coming months and years, according to futures trading.
The question is whether the updated dot plot due today might factor in the recent economic slowdown around the world that’s
pushing bond yields lower and also causing the spread between relatively high U.S. yields and very low European yields to widen.
The Fed isn’t expected to make any rate changes today, but Fed Chair Jerome Powell’s press conference following the 2 p.m. EDT
decision, along with the dot plot release, might help investors fill in some of the blanks about the long-term rate picture.
Stocks have been on a tear thanks in part to the Fed’s desire to stay “patient,” and watch the data come in. At the same time,
U.S. benchmark 10-year Treasury yields are just above 2.6%, back near January lows but still way above the benchmark European
yield. Futures prices at the CME show no chance of a rate hike and less than a 2% chance of a rate cut today. By the June meeting,
chances of a cut in rates rise to above 9%, and futures factor in about a 22% chance of the Fed cutting rates by year-end.
As we’ve also been saying, investors might want to listen this afternoon for any updates on the Fed’s balance sheet plans.
Powell arguably walks a fine line on the balance sheet going into the meeting. A move by the Fed to announce the planned end its
balance sheet unwinding, which it has hinted at, might be seen as positive from a market perspective but negative from an economic
one.
It seems like the Fed has spent the last few months preparing investors for possible dovish moves like that, as Powell and
others continue to note slowing economic growth. The risk, potentially, would be for the Fed to take this step more quickly than
investors had expected. Such a move might be seen as a sign that the economy is worse than investors may have thought.
On the other hand, lack of action to slow or stop the unwinding could be seen as the Fed getting behind the curve, so to
speak.
Also, we’ll see if Powell says anything about where he and other Fed officials now see the so-called “neutral” short-term
interest rate. That’s the level where the Fed would see rates not being too tight or too loose. In December, this level ranged
between 2.5% and 3.5%, according to Fed officials. The Fed’s benchmark rate now is between 2.25% and 2.5%. If the neutral level
comes down, The Wall Street Journal noted, that could imply that the Fed sees less need for future rate hikes.
See-Saw Action Tuesday Amid Conflicting Trade Reports
Tuesday’s market looked like a trade tug of war between conflicting reports, with stocks getting pulled back and forth for much
of the day amid confusion about progress in U.S./China talks. One media outlet reported difficulties, taking stocks lower, but then
another outlet reported the negotiations might be nearing the finish line. With investors apparently unsure about the situation,
the market veered toward the flat-line after initially rallying. By the end of the day, the Dow Jones Industrial Average’s ($DJI)
four-day win streak was over.
The quick downturn after an early rally once again might indicate just how closely the market appears to be following
negotiations. A lot of reports lately said the talks could spill over well into June, so the jumpiness probably isn’t going away
anytime soon.
Though Boeing Co (NYSE: BA) got beaten
down the last two weeks due to safety concerns, investors might want to also keep in mind that both BA and Caterpillar
Inc (NYSE: CAT) have also been seen as
barometers of the China situation, since both companies do so much business there. That’s why it might be important to watch their
performance in coming weeks to potentially get some insight into market optimism or pessimism about tariffs. Shares of the two
companies were mixed Tuesday, with neither making any steep moves in either direction.
Another area that could be worth watching for trade sentiment is semiconductors, which have been outpacing the overall market
gains since the start of the year. These companies tend to have a higher than typical exposure to the China market. In some ways,
one could argue that semiconductor companies have taken the lead so far this year and have helped provide momentum across other
parts of the market, kind of the way the FAANGs did last year.
One big gainer in the chip space Tuesday was Nvidia Corporation (NASDAQ: NVDA), up more than 6% as the company hosted a tech conference that included
product announcements. Another was Advanced Micro Devices, Inc. (NASDAQ: AMD), which rose 11% after news reports that AMD would partner with Google on a
game streaming platform.
Preparing for the Worst?
If things start to look sketchy on the China negotiations, that might be picked up in some of the stocks that typically are seen
as having less China exposure, including Utilities, Real Estate, and Consumer Staples. Strength in the Treasury market or a rise in
the VIX (the market’s most closely watched volatility indicator) might also indicate investor concerns about the China
situation.
Speaking of Treasuries, yields remained pretty muted Tuesday as the Fed gathered. The 10-year yield was at around 2.6% early
Wednesday, while the two-year was at 2.46%. That spread is sometimes watched, because a flat or an inverted curve—in which the
longer-term Treasury yield falls below the shorter-term yield—has sometimes been associated with receptions. That spread fell to
single-digits late last year, but has been pretty steady in the teens for weeks.
On the data front, investors might want to stay tuned Thursday for February leading indicators and the March Philadelphia Fed
Index. Factory orders for January rose just 0.1%, a bit below Wall Street’s consensus. Like other reports from that month, it might
be helpful to take that one with a grain of salt due to the government shutdown and bad weather.
Financials Rally Into Fed: The Financial sector (candlestick) had a rough day Tuesday, but has rallied from
recent lows going into the Fed meeting. Part of the strength could stem from thoughts that low rates might raise loan demand.
However, Info Tech (purple line) is up much more sharply over the last month. Data Source: S&P Dow Jones Indices. Chart source:
The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future
results.
Deutsche’s Woes: This week struggling Deutsche Bank AG (NYSE: DB) said it’s considering merging with its rival in Commerzbank, a strategy
favored by German’s ministry of finance for several months. In the past year, DB’s shares have plunged more than 40% as it
undergoes a restructuring plan that includes significant job cuts. The German lender has been riddled with setbacks since the
financial crisis of 2008, including facing billions fines over issues like its role in toxic mortgage assets, a money-laundering
scheme and interest rate manipulation. In Q4, Deutsche reported a net loss that fell short of estimates, although it reported its
first full-year profit since 2014. Some third-party analysts say a merger with Commerzbank would help Deutsche and the German
banking system recover, but others aren’t so sure.
Apple Event Looming?: Technology giant Apple Inc. (NASDAQ: AAPL) is reportedly gearing up to announce a new media and entertainment service
at an event scheduled for early next week, according to Bloomberg. It appears to analysts that AAPL is trying to lean on
service-type revenue as its revenue from iPhones has been a bit lackluster, down 15% in the company’s fiscal Q1. Its video
streaming service is expected to include free original content and paid subscription options for content from companies like Starz
and Showtime. While AAPL’s plans for new services are attracting attention, it’s not giving up on hardware efforts. AAPL just
rolled out an update to its iMac desktop that includes faster processors and new graphics chips. It also revamped its iPad mini and
iPad Air.
‘Tis the Season—for IPOs: With the start of spring, initial public offerings (IPOs) seem to be in the air along
with the chirping of robins and the sound of baseballs hitting the bat. Some of the companies that might launch IPOs soon include
popular technology and customer service firms, so the names are likely to be familiar to many. However, investors should consider
keeping a cautious outlook. How many times in recent years have we seen a stock have an IPO with a lot of publicity, only to crater
soon after opening day? Sometimes people confuse a company and a business. You may love the product, but that doesn’t necessarily
mean you have to love the stock, too.
The problem with IPOs is that many people rush in with both hands, but it might be worth waiting to see what the stocks do. Or,
if you do jump on an IPO, you might want to consider only buying shares in partial increments and not going all in at once. People
are excited to invest in these companies, and it’s exciting that retail investors are getting these opportunities, but they should
probably keep the potential downside in mind. People don’t plan for things going down, and that’s when they often get into
trouble.
Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any
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© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.