Fed Day - 'It's All About Size!'

What You Need to Know Today

• FED to announce today at 2 pm – it’s all about size

• Media makes noise about US/China Trade

• Global mkts remain in holding pattern

Stocks closed ever so slightly LOWER on Tuesday as investors/traders and the Algo’s wait patiently for the FOMC (Federal Open Market Committee) announcement today at 2 pm…..What will happen?  Will the FED surprise us with a rate hike (not), will they surprise us with a  rate cut (again not) will they remain in neutral (yes) – but what will be important to you and to the mkts is what will the longer term message be?  Not so much about rates per say –but about the size and construction of  FED’s portfolio (which in the end will cause rates to move anyway)  – will it continue to be a mix of both long and short duration notes, bills and bonds – as it has been since the GFC (Great Financial Crisis) prompted them to launch what is known as QE (Quantitative Easing) or will they move back to a portfolio mix that is more reflective of a FED in the ‘pre-crisis’ era?  And that mix was much more short term in duration……

Now to be fair – the mkt is not expecting them to qualify that exact mix today – that is longer term discussion – but apparently the mkt is expecting Jay Powell to probe that question and begin to make a case for both sides so that the conversation is out there and so that the mkts will not be ‘caught blindsided’.    There are competing arguments – and both are relevant and neither one is ‘better’ – they are just different  - so depending on your point of view – will determine what you think.  This is where the ‘dot plot’ comes in….it is each members assessment of where they think rates should or will be in the years ahead….but with that graphic will be a discussion of how to get there……. Here are the two options – one is raising rates and the other is leaving rates lower longer – but to be clear -  this is a decision that spans 2 and 3 years out – not today or tomorrow per say.  In the end – it’s all about size (of the balance sheet)

1.           Allowing the portfolio to favor shorter term maturities -with an average maturity time frame of about 4 yrs – which is what it was and essentially tightens conditions – think raises rates but allows the FED to move faster in the next downturn which is good but this would be LESS stimulative now and the mkts will not like this policy move.  Expect the algo’s to throw a hissy fit.
2.           Maintaining the current mix of short, medium and long term maturities –  with an average maturity of about 9 yrs - which is what it became during the crisis and provides more stimulus – think leaves rates more neutral but provides for less maneuverability in the next downturn because continued low rates will leave the FED less room CUT.  Expect the algo’s to approve of this move and take the mkt higher.   (Can’t wait to see what @AOC has to say about his policy move!)

And while this is important – it is a discussion that is not expected to be finalized today at all – but is expected to be ‘floated’ so that the mkts are aware of the debate more clearly. So instead of the FED just raising rates – they can achieve higher rates over time by choosing option 1 – which by the way – should be the answer so that we get back to normal.     Yes expect that the FED will continue to support their most recent dialogue  and maintain rates where they are – citing a number of reasons – Trade with China, Slowing Global Economy, low inflation etc…all as reasons to stay put…but also expect them to make it very clear that this is NOT a static decision – it is not a decision that is implemented and controlled by Jay Powell – it is a dynamic decision – or rather a decision that takes place over time and takes into account the previous actions of the FED coupled with events that are OUTSIDE of the FED’s control.  Again think trade with China (and the rest of the world), think monetary and fiscal policies that can cause expansions and contractions in the global economies, think political and policy disruption at home AND abroad that can cause mkts to advance or decline.  So in the end – what I am saying is – It’s not just one decision – think about 10th grade science class – during a physics experiment – You can never just do one thing – every action causes some kind of reaction and many times those reactions can be unexpected.  Just sayin’ – Give the guy a break!

Volumes were a bit lighter than usual as the mkt whipped around a bit – the late weakness in my opinion was just some profit taking ahead of the FED announcement later today and the turn does not suggest a change in psychology…..We would have to see Tech, Industrials, Energy and Financials suddenly come under pressure to change our minds about the longer term trend – yet could we be seeing a short term pullback in the mkts – as the trader types ring the cash register and take some money off the table ahead of what is seasonal weakness?   Yesterday’s weakness in the transports (-1%) makes this argument clear and FDX’s poor earning’ announcement coupled with weak forward guidance is not going to help that sector and may even give reason for investors to take some money off the table.   This morning – FDX is quoted down 12 pts or 6% in the pre-mkt hours. 

The Dow, S&P and Nasdaq all ended the day around the flat line,  The Russell and the Transports reacted a bit more negatively to the tone falling 9 pts  or 0.57% and 137 pts or 1.32%  respectively and a quick look at their charts reveals that they are both in the exact same trading pattern – they kissed their long term resistance trendlines at 1,582 and 10,534 and failed – and so when we are readying for a FED announcement that is unclear -  that failure causes a bit more aggressive profit taking….remember that the Dow, S&P and Nasdaq have all broken up and thru their respective trendlines last week and have since rallied hard as the expectation of a dovish FED has helped to fuel that fire.  Now if the FED remains dovish today – then I would expect the Russell and the Transports to push up again (Transports maybe not – due to FDX)  following the other indexes and if the FED surprises mkts (unlikely) then expect the Dow, S&P and Nasdaq to follow suit and move lower. 

Overnight Asian mkts ended the day mixed as investors await the FED announcement  - word that new uncertainty is emerging between the US and China also caused some angst- but this is more noise than anything else…..in the end – word was that the deal we thought we had by month end has been pushed to April as both sides continue to battle and sort this out.  Bloomberg causing all the noise as their sources told them that China is pushing back on the US because they have not been assured that Donny will lift the tariffs he imposed a year ago.  Really?  Isn’t that what the trade discussions are meant to do?  Makes zero sense – but does cause noise which then causes a reaction…see – 10th grade science class again!  Japan +0.20%, Hong Kong – 0.49%, China +0.04% and ASX -0.36%.

European mkts are all a bit lower for all the same reasons…FED and Trade…Period.

US Futures are pointing ‘higher’ at 6 am….Dow +15, S&P +2, Nasdaq +8 and the Russel +1.   Fed decision comes at 2 pm and expect to hear more about trade with China since Bloomberg raised the level of angst…for no reason whatsoever…..Bobby (Lighthizer) and Stevey (Mnuchin) are both expected to return to Beijing next week to continue the discussions with Vice Premier Liu He.  There are no real eco reports today so expect all eyes to be on the FED.

 

Zeppole's

Now I had a brain freeze yesterday – March 19th is St Joseph’s day – and in the Italian household it’s all about the pastries…..Zeppole’s are one of the day’s staples.  They are easy to make and so good.  Forgive me for not giving you this recipe yesterday…..but make them today.

For these you need: a deep fryer, vegetable oil,   1 c of flour, 2 tsp of baking powder, salt, 1 ½ tspn of sugar, 2 eggs, 1 c of fresh ricotta cheese, ¼ tsp of vanilla, and at the end - confectionary sugar for dusting.

Heat the oil in the deep fryer to 375 degrees,

In a medium sauce pan – over low heat – like simmer – mix all the ingredients – except the confectionary sugar -  until they are combined – it should be sticky.  Remove from the heat.

Using a tablespoon – drop the batter into the hot oil maybe 3 at a time……as they brown – they will naturally turn over by themselves and brown on the other side- total fry time maybe 4 mins…..remove and place on paper towels to drain – dust with the confectionary sugar and serve warm….mmmmm