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Morning Commentary

WHO SPOKE THE MOST IMPORTANT WORDS IN WASHINGTON?

By Charles Payne, CEO & Principal Analyst
7/30/2020 9:17 AM

Yesterday saw four Big Tech CEOs of companies worth a combined $4 trillion or more in market value take heat from both sides of the political aisle. In a different location on Capitol Hill, Jerome Powell was giving prepared remarks ahead of taking questions. One event saw a little drama while the other moved the market.

Fed Statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate. - Jerome Powell, Chairman of the Federal Reserve

Powell Pushes Congress

There was news along with the Federal Open Market Committee (FOMC) decision. The Federal Reserve Board announced the extensions of its temporary U.S. dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities (FIMA repo facility) through March 31, 2021.

I think the most intriguing part of Powell’s testimony was his deliberate efforts to push lawmakers to do more.  He sees the Federal Reserve and the federal government as a one-two punch with the latter having the tools to get cash into the hands of Americans immediately. Powell answered a question on inequality by pointing out how insidious the virus has been for lower-income households.

One stat that hit everyone was a Fed study that showed people earning $40,000 or less had a 40% chance of losing their jobs due to a pandemic shutdown.

He pointed out that even with a vaccine, it will take some time to bring back certain industries that employ millions of people; as they wait, they will still have bills to pay.  

It’s clear the Fed is paying attention to high-frequency data, which has probably cemented additional action even if current flattening trends hold up. There is no doubt there will be a chink in the V-shaped rebound, although the degree of which remains a mystery. 

The main problem with the Q&A segment of Powell’s appearance was too few questions on the size and form of the next accommodation. When the topic came up, Powell pushed back on the notion that the quiver was empty, while slyly not saying flatly that negative rates were out of the question. 

By the same token, he did not mention curbing the yield curve.

Fed Arrows:

By the way, do not look now, but the value of negative bond yields is approaching record levels again.

Germany

France

Netherlands

Switzerland

United Kingdom

Spain

Finland

Slovakia

Slovenia

Italy

Portugal

Japan

Even when answering the question on more arrows, Powell stressed the need for fiscal authorities to come to the rescue.

Other observations include Powell’s statement that disinflation pressures are a long-term struggle for the Fed, not inflation. This should be good news for gold and silver, as the Fed balance sheet will continue to swell. Overall, the market was okay with Powell’s testimony.

The Message of Market

Market bias was to the upside all session. Buying picked up during and after the FOMC press conference. A 10 million-barrel drawdown in crude oil propelled the Energy sector. Investors continue to sift through the brick-and-mortar carnage. L Brands (LB) was the biggest winner, and Capri Holdings (CPRI) and Gap Inc (GPS) were also in the top ten.

S&P 500 Index

+1.24%

Communication Services XLC

+0.92%

Consumer Discretionary XLY

+1.01%

Consumer Staples XLP

+0.14%

Energy XLE

+2.09%

Financials XLF

+1.87%

Health Care XLV

+1.05%

Industrials XLI

+1.52%

Materials XLB

+0.82%

Real Estate XLRE

+1.89%

Technology XLK

+1.45%

Utilities XLU

+0.46%

Yesterday, Financials had a good day, but a miserable year, as reflected by the performance of SPDR S&P Bank ETF (KBE).

Big Tech Smashup

It was another spectacle on Capitol Hill, as Big Tech CEOs dealt with a wide range of questions and a lot of animosities. The exchange between Congresswoman Scanlon and Jeff Bezos best encapsulates how much of a waste of time the hearing was. She was relentless in browbeating the CEO of Amazon, going down memory lane on his takeover of Diapers.com a decade earlier.

He could not get a word out before she steamrolled him again with the next comment or question (not much of a difference). There were weird questions on why businesses would take action to remain big and powerful, rather than allowing competition to get larger and take them down. 

I hope something happens with the rip-offs of small businesses and entrepreneur ideas, as well as less bias toward conservatives - but overall, the thing was a mess. Perhaps it’s fun to watch if the nearest demolition derby is shut down.

How interesting it is in a nation with a political duopoly to hear lawmakers complain about a lack of competition.

Portfolio Approach

We got aggressive yesterday, using three buckets of cash in the Hotline Model Portfolio.  

Today, it’s all about those Big Tech earnings.  

Today’s Session

Anxiety over those big tech and communication names reporting after the close has pressured the market all morning.  Major indices have been down a little less than one percent all morning even as major earnings releases have come in substantially stronger than anticipated.

Key Earnings

United Parcel Services (UPS)

Qorvo (QRVO)

 Qualcomm (QCOM)

 Paypal (PYPL)

Overall, earnings have come in better then expected and more companies are offering guidance; although, nowhere near normal levels.

Economic Data

GDP and jobless claims came out this morning, and it’s not pretty.

GDP -32.9% consensus -34.7%

Interestingly, personal income +1.39 trillion and savings +25.7% to $4.69 trillion from $1.59 trillion in the first quarter.

Overall, most records were shattered as the second quarter was one of the worst in recorded history.

Chart showing Real GDP: Percent change from preceding quarter

SOS Congress

Initial jobless claims were fractionally higher at 1.43 million, but continuing claims soared 867,000 to 17.0 million.  Combined with Pandemic Unemployment Assistance, there are more than twenty-nine million Americans getting unemployment help.  Congress must pass something ASAP.

Continuing Jobless Claims

United States Continuing Jobless Claims

Say What?

President Trump just tweeted about delaying the election and it sent the market lower than all the economic data of the morning. Even musing about something like this invites a different kind of fear and opens the door for hysterical political hijinks during a period of enflamed rhetoric and controversy.

Donald J. Trump@realDonaldTrump

With Universal Mail-In Voting (not Absentee Voting, which is good), 2020 will be the most INACCURATE & FRAUDULENT Election in history. It will be a great embarrassment to the USA. Delay the Election until people can properly, securely and safely vote???


Comments
Calling the President's tweet re delaying the election ill-timed is far too kind. When is Trump going to realize that his knee jerk tweets are hurting not only his own image, but the country? Please Donald, let your advisors review and filter your tweets!

Austin Scudieri on 7/30/2020 10:22:19 AM
I am so saddened to hear of the passing of Herman Cain. He was an amazing businessman, leader and person. Herman will be missed. God rest his soul.

Ken Sherr on 7/30/2020 3:25:41 PM
 

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