FED Comments Create Confusion, Algo's Over-React

What You Need to Know Today

• Fed comments confuse mkts

• Once again Algo’s over-react

• Asian Mkts Soared on news while Euro mkts back off

• US Futs give up overnight gains

Mkts go from negative to positive on comments by 2 FED members…..focus shifted (for the day) from earnings to interest rate cuts…..

It’s almost comical….really…..US macro data holding steady, Earnings so far have not be a disaster overall, individual names that miss are being punished, but that punishment has not affected the broader mkt……Unemployment at all-time lows, rising wages, already low interest rates, GDP at 3%, strong job growth, strong retail sales, rebounding manufacturing surveys and gains in the CPI all creating a set of data points that suggest anything near ‘distress’ right?

But – enter stage left - NY Fed President Johnny Williams  drops this ‘bomb’ saying  that “ when you only have so much stimulus at our disposal, it pays to act quickly to lower rates at the first sign of economic distress”….. and Richie Clarida (Fed Vice Chair) saying that “You don’t need to wait until things get so bad to have a dramatic series of rate cuts, we need to make a decision based on where we think the economy may be heading and , importantly , where the risks to the economy are lined up”……..That’s all the algo’s needed to hear…the mkt (S&P) went from – 11 pts to + 11 (or a 22 pt swing from lo to high) as the assumption now is that Johnny and Richie were ‘testing the mkts’ , that  they were charged with taking the temperature and that the FED is really (quietly) considering a 50 bps pt cut next week vs the 25 bps cut that mkts had come to expect.   Now look – there has always been a small contingent of players that keep screaming for the FED to cut 50 bps at this meeting….but they appeared to be outliers after Powell’s testimony last week where it became clear that while rates were headed lower – 25 bps appeared to be the call.   But yesterday – after these comments – Fed Fund Futs shot higher and now reflect a 71% chance of that 50 bps cut  - it’s exhausting….By the end of the day – all of the indexes went from negative to positive leaving the Dow +3 pts, the S&P + 10 pts, the Nasdaq added 22 pts and the Russell was ahead by 5 pts. 

Economic Distress?  Is that how we are describing the current environment?  Am I to believe that the US (or Europe & Asia) are in economic distress?  Distress was the GFC (Great Financial Crisis) of 2007/2016, Distress was unemployment at 10%, Distress was a collapse in housing, Distress was a 60% collapse in US equity mkts, Distress was zero interest rates……  - and last time I checked – we are nowhere near those distress levels (see data points above) ………so what exactly do these guys mean?  Were they just commenting on monetary policy moves in general about how a central bank should act or were they ‘hinting’ at what the FED is about to do?   Well, not sure,  which makes you wonder - are we being driven by the ECB (European Central Bank), the BoJ (Bank of Japan) and the BoK (Bank of Korea) – all of which have signaled rate cuts – or are we driving the bus?  Either way - you can be sure that both the NY Fed and the US Fed are suddenly scrambling to confirm that a rate cut is coming but that a rate ‘slashing’ is a bit premature….and that the interpretation of the spoken word was again misinterpreted by the smart logic algo’s leaving the human being to digest and interpret what they meant…… US futures were higher overnight as that excitement washed over Asian mkts but have since come off those highs as ‘cooler heads’ appear to be prevailing…..

Headlines this morning detail the moves….”Japan Jumps 2% as Hopes Rise for MORE Easing from the FED” – so stocks across the region rose as those bets heat up…..Hong Kong + 1.07%, China +1.05% and ASX +0.77%. 

European mkts though are not so sure….they initially rose on hopes of a bigger cut but have since turned lower as the NY FED tries to ‘walk back’ Johnny’s comments saying that the comments were taken out of context and that he was in fact talking about academic research vs. any potential move by the FED.  (Taking out of context  or having the smart algo’s completely misinterpret resulting in a ‘shoot first ask later mentality’)  My guess is mis-interpret….but hey – What do I know? 

Well here IS what I know….US futures which had shot higher yesterday and overnight have now come off those highs – why?  Because it’s ridiculous really.  I  mean I’m still in the camp that we don’t need a cut at all – but clearly I’m in the minority – I guess – but I’m in the minority with some smart people….(which always makes me feel good). Either way – like we discussed last week – Powell has painted himself into a corner – he HAS to cut rates now – to confirm any credibility at all….because he told both houses of congress and the world that a rate cut was coming….so even though economic data points are not screaming for a cut – 25 bps is just the take back of the pre-mature December rise…..leaving fed funds in the 2% - 2.25% range.  

There isn’t much eco data today – so – it will be back to earnings, a discussion about what the heck happened yesterday, new news on Trade Talks and  ….. U.S. and Chinese officials held phone conversations last night and it appears more face-to-face meetings are likely in the near term.  On the geo-political side – expect to hear about how we shot down an Iranian drone in the Strait of Hormuz….in what the administration is describing as ‘defensive’.

Yesterday they took the S&P right back to 2995 – leaving us in the 2975/3000 range.  My sense is that as investors dissect the FED comments yesterday – they will realize that nothing really has changed and that a 25 bps cut is what we are getting and the mkts have already priced that in……so it’s back to earnings.

 

Rotini Michael Angelo

This is a simple dish to make....it is a favorite of Italian sculptor, painter, architect and poet of the high renaissance.  A man of unparallel influence over the world.   Michael Angelo - long considered one of the greatest living artists the world has known was also a simple man - enjoying simple dishes - so  give this a try.

For this you need:

Rotini, fresh spinach, yellow raisins, pignogli nuts, fresh ricotta  olive oil and fresh grated parmigiana.

Begin by bringing a pot of salted water to a boil.  add the Rotini.

In a bowl -add hot water and soak the raisins.

Now in a deep frying pan - add a bit of olive oil and toast the nuts....stirring not to burn. Once toasted - set aside.  In the same pan - add a bit more oil and the spinach.  Season with s&p and sauté.

After about 3 mins - add in a small container of the fresh ricotta - stir  to melt and blend.  Now - add in a ladle of the pasta water. Stir.

Now add the raisins  - stir - When the pasta is almost done - remove directly from the pan and add to the frying pan with the spinach and ricotta mix.  Toss nicely to coat.  Add the pignogli nuts and another ladle of pasta water.

Once well mixed - add in a couple of hands of fresh cheese - toss and serve.

Simple and very classic - just like Michael-Angelo.