When you're down and troubled

And you need some love and care

And nothing, nothing is going right

Close your eyes and think of me

And soon I will be there

To brighten up even your darkest night

-Carole King

Yesterday, Jay Powell tried his best to prove he was a friend of the market while also acknowledging solid growth that historically wouldn’t call for central bank intervention. It was a delicate tightrope.  Although he has a long way to go, I think this was his best Federal Open Market Committee (FOMC) Q&A period, as he avoided anything glib or superficial, and even used a cheat sheet rather than going for adlib or off-the-cuff chatter.

Out of the gate, Fed Chairman Jerome Powell talked about the strength in the economy, underscoring the rate cut was “in order to provide insurance against risks,” which he says are coming from a weakening global economy and decline in investment associated with the trade war.

Key Comments:

When he was asked about underestimating reserve needs in the banking system, Powell said, “the Fed would resume organic growth of the balance sheet earlier.”

Later, someone asked what “organic growth” meant, to which Powell went on the talk about the temporary open market moves in repos and learning more over the next six weeks.

“There may come a time when the economy weakens, and we would have to cut more aggressively. We don’t know.”

Powell suggests the Fed is open to “a more extensive sequence of cuts” even though there doesn’t appear to be a need right now.

He Didn’t Blow It

The bottom line is Powell didn’t mention mid-cycle adjustment or transitory low inflation. The market breathed a sigh of relief after initially tumbling on the release of the Dot Plot that says no more rate hikes.

Although most market watchers thought the Dot Plot was bunk, it took several answers from Powell to turn the Dow Jones Industrial Average, which tumbled 200 points.

Dow Jones Industrial Average 5-Day Chart

The Dow Jones Industrial Average and the S&P 500 eked out slim gains, although the tone of the session was decidedly cautious as Utilities were the best performing sector. Financials got all the press as Wall Street’s conventional wisdom continues to believe this sector has turned the corner. 

I was impressed with Consumer Staples after General Mills (GIS) got hit at the open on so-so guidance. The stock has been a juggernaut this year. It could have given up more ground but finished fractionally lower.

• Utilities (XLU) +0.42%
• Financials (XLF) +0.35%
• Consumer Staples (XLP) +0.16%
• Materials (XLB) +0.01%

Lionheart or No Guts?

Jay Powell had a difficult task of not only overcoming hopes on Wall Street and demands from the White House for a deeper rate cut but also the so-called Dot Plot, which suggests the next action from the Fed will be a rate hike in 2021.

No Recession - No Inflation

The FOMC offered some adjustments to economic projections with a slight increase for the Gross Domestic Product (GDP) and the unemployment rate for 2019. However, target inflation is still a couple of years away. The Fed’s room needs to be more aggressive with future rate cuts, and some might say it creates a sense of urgency to make deeper cuts now.

FOMC Economic Projections	2019	2020	2021
GDP	2.2	2.0	1.9
June Projection	2.1	2.0	1.8
Unemployment Rate	3.7	3.7	3.8
June Projection	3.6	3.7	3.8
Core Inflation	1.8	1.9	2.0
June Projection	1.8	1.9	2.0
Fed Fund Rates	1.9	1.9	2.1
June Projections	2.4	2.1	2.4

Investors are going to have to play that presser back a few times and determine if Powell will step up to the plate and continue to support the expansion and be proactive or if he will be too cautious.

It’s a fair question and one that remains to be answered. I like that he took the first step and took precautions not to say the wrong thing yesterday.

After the Close

• U.S. Steel (X) warned again, pointing to lower steel prices, sending its share price much lower.
• Microsoft (MSFT) announced a $40 billion share buyback program.
• Herman Miller (MLHR) office furniture posted a very impressive earnings release, sending its shares higher.

Portfolio Approach

Communication Services	Consumer Discretionary	Consumer Staples
1	2	1
Energy	Financials	Healthcare
1	1	2
Industrial	Materials	Real Estate
3	2	1
Technology	Utilities	Cash
3	0	3

Today’s Session

Equity futures opened much lower and began slowly drifting higher, then picked up speed on two items.

• Economic Data: Manufacturing Still Holding On
• Fantastic beat on Philly Fed, which shows the reported demise of manufacturing might be exaggerated.  Even more encouraging employment numbers popped nicely.

Philly Fed Report	September	August
General Business	12.0	16.8
New Orders	24.8	25.8
Shipments	26.4	19.0
Prices Paid	33.0	12.8
Prices Received	20.8	13.0
Number of Employees	15.8	3.6
Work Week	13.0	6.8

The Fed Steps up Again

Fed Pumps in Cash

• $84 billion submitted
• $75 billion accepted

 

 

 

Comments

Behind - not keeping up with, later than; after... The rest of the world rates are negative and he cuts a quarter point. No surprise and to Charles point at least he didn't blow it with glib or stupid comments and that is a first. But his rate of progress is paralyzed by his lack of determining what his blind side is. He fails to recognize that having to pump that much into repos is a canary in the coal mine of just how far he is behind the curve. Hope Rip Van Winkle wakes up sometime before we lose all the hard fought gains. The Fed is STILL paying interest on bank reserves. WHY? This is why IMHO after the fantastic tax cuts, and regulatory pullback the velocity of money and money multipliers are barely moving up. Until that happens the Keynesian idiots still are on inflation watch. For now we continue to walk on the the razor blade of returning to deflation and never reaching what our economy is truly capable of. Powell Ray Weldon on 9/19/2019 11:04:18 AM

When is the Fed going to realize that they and their interventionist activity are the problem and have been since its inception more than a century ago? They are an extra-constitutional function of government, one the Founders never imagined. They need to follow previous Fed boards and follow the banking system, and not act like a three-legged table and put the million-plus-legged economy at their mercy by typing over an economy that is standing on the opinion of millions, not the whim of a few elitist economists who need to read Milton Freedman in their spare time. I am one of those legs and I wish the Fed would take a seat, a back seat. Karen Humeniuk on 9/19/2019 11:30:20 AM

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