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Morning Commentary

DID POWELL PUNT?

By Charles Payne, CEO & Principal Analyst
5/2/2019 8:08 AM

The narrative coming out of the Federal Open Market Committee (FOMC) press conference is the Fed isn’t going to cut interest rates anytime soon because Jay Powell & Co believe decelerating inflation is transitory. I think he’s wrong. He’s ignoring the new Amazon (AMZN) world of deflation that’s having an even more profound impact on inflation than the Walmart (WMT) disinflation imported from China. 

When asked about low inflation that clearly hasn’t been transitory, Powell acknowledged it’s bedeviled all central bankers, but the Fed has gotten closer to its inflation target. Still, it was mentioned that outside of the period during the build-up of the housing bubble, core inflation has been historically low.

Powell admitted the problem with lower consumer inflation expectations is unreasonably low inflation expectations. Currently, the Fed is reviewing its monetary strategy.

Going into the press conference, there were five potential reasons the Fed could cut interest rates:

While it’s far-fetched that the Fed would raise rates to help a strong economy, Powell and future Fed chairs will have to grapple with public and political pressure to use their magic money-printing machine for the greater good.

It’s a role that the Fed thinks is already going through its dual mandate on inflation and employment.

When Powell speaks about the role of the Fed, his posture improves and there’s visible pride in their handiwork, which goes back to saving the economy at the onset of the Great Recession. That’s his view, along with many others, myself included. I think the Fed has been too focused on saving banks.

Be that as it may, I don’t think the Powell Fed is going to hurt the economy until there are clear signs of an inflation risk. There is a chance the Powell Fed could cut rates this year, although it’s less of a chance than 24 hours ago. 

No More Recessions

It’s taken as an inevitability; and yet, some smart folks have opinions, pondering the possibility whether the U.S. can avoid future recessions. I’m pretty sure that was the promise when the Fed was created in 1913. It hasn’t worked that way. To be sure, some nations have put in long stretches without a recession:

Now, some are saying tools created during the Great Recession will prevent recessions in the future, but also limit upside growth.

Federal Reserve’s New Tool Box

QE

Quantitative Easing

 

Dec 2008

Mar 2010

ZIRP

Zero Interest-Rate Policy

Dec 2008

Dec 2015

QE II

Quantitative Easing Two

Nov 2010

Jun 2011

Operation Twist

Twist

Oct 2011

QE

Quantitative Easing

Sep 2012

Dec 2013

 

The Rally Blinks

Wednesday was a tough session for the market, which has been looking for a tough session for a long time. The market breadth was ugly, except for 52-week milestones:

NYSE

NASDAQ

The down volume on the NYSE was 2.8 billion against 786 million shares on the upside, while the NASDAQ saw 1.5 billion down volume, versus only 690 million up volume.

Timber!!!

The ‘Pain of Missing’ earnings was on full display yesterday. This is what happens when everyone from management to Wall Street analyst sandbag earnings predictions. When those low hurdles can’t be cleared, guidance is subpar, so watch out.

Great Year Inflection or Pause

Year-to-Date

I have always said it’s the session after the FOMC meeting ends that matter more than the last two hours of trading when selling triggers additional selling. The session did remind investors that most stocks have had great years in four months, so some are priced for perfection. 

Today’s Session

It’s looking like an indecisive start to the session, which could pressure would-be sellers.  We asked subscribers to take profits on three positions yesterday, and we will take profits on another this morning.  (If you’re not sure, make sure to contact your rep or research@wstreet.com.) If you are not on our Hotline service, click here to get started today. 

So the day after the Fed meeting, and its clear Wall Street will continue its temper tantrum, which is a little more valid than usual this time.  That’s because Powell built up a case for rate cuts, then pulled the rug by suggesting the case was built on transitory factors.  His reasoning might be more rationale about the Fed’s underlying work missing events on the ground. 

This is a common occurrence for the Fed, but it is more glaring after aggressive rate hikes to fight inflation, which never showed up.

Powell’s hunch on inflation could be challenged if this morning’s report on productivity proves to be more than a blip. Coming in at an annualized rate of 3.6%, U.S. Productivity blew away consensus of 2.2%, as unit labor costs were the weakest since first quarter 2013.   Strong productivity is indicative of the start of the economic cycle not the end.

Let's not force the issue this morning.


 

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