Yesterday, investors waited with bated breath for the Federal Open Market Committee (FOMC) minutes and immediately reacted to cherry-picked items before a complete reading tempered the initial enthusiasm.

Economic Assessment:

• Inflation moderating
• Financial conditions loosening
• Lower yields reflect inflation compensation
• Recession odds increased in coming quarters
• Markets reflect uncertainty

Outlook:

• Keep interest rates restrictive “for some time.”
• Emphasize commitment to push rates well into restrictive territory.
• Aware of risk of “overdoing it.”
• Pivot after economy is cooling down “sufficiently.”
• “Bulk” of rate rises not yet significantly felt.

Probabilities of a 75-basis points (bps) hike next month surged to 61%, then fell to 35.5% from 41.0% before the report.

Labor Force

There were curious comments about the labor force being so strong that the second quarter Gross Domestic Product (GDP) could be revised higher. Yet, there was an admission that the labor market might now be as tight as some indicators suggest.

There are no other economic data points that corroborate the employment data from the Fed, and questions are being raised on the methodology about job seekers and even the number of job vacancies.

The Economy

With the retail sales ‘miss’ coming on the heels of that housing starts debacle, the third quarter GDP forecast at the Atlanta Fed has tumbled to 1.6% from 2.5% this week. 

If they used earnings as part of the gauge, the number would be even lower – maybe negative. But don’t worry, the experts won’t call a recession no matter how often the quarterly GDP is negative.

Market

A major rally attempt fell short, and selling resumed, pushing the market back to where it was when the FOMC minutes were unveiled.

There were six up sectors, led by Consumer Staples (XLP), and interestingly, followed by Consumer Discretionary despite the negative reactions to financial results for big-time players.

The market looks tired. Perhaps, the summer blahs have finally kicked in.

Portfolio Approach

There are no changes in our Hotline model portfolio.

Today’s Session

The market has been slightly higher all morning in preopening trading but nothing decisive.  The biggest news coming from the Philadelphia Fed Manufacturing Survey.

After two consecutive months of declines, the Philly Fed reversed 19 points to finish +6.2 while The Street was expecting -5.0.

• Expectations climbed 20 points but remains negative at -5.1.
• Prices paid declined to 43.6 from 52.2 this is the lowest level since April 84.6
• Prices received declined to 23.3 from 30.3 the lowest level since November 62.9

Some are calling this a Goldilocks report in the aftermath of a massive crash from the Empire Fed report.  Without a doubt there was a sigh of relief.

Interestingly, the special report points to pricing power, also sees pricing relief for consumers over the next 12 months and ten years compared to the May survey.

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