Yield Curve Inverts (again), Dissent w/in the Fed, Jay Powell Takes the Stage at 10 am

What You Need to Know Today

• Yield inverts again and could invert again today

• Trump does a 180 on his recent tax talk

• Jay Powell takes the stage at 10 am

Stocks were all over the place yesterday as the start of the Jackson Hole Symposium got under way – First we got a mixed bag of eco data -  better Initial and continuing jobless claims – that’s a positive – but then  we got weaker Bloomberg Economic Expectations…..falling more than 7 pts from last month and then we got weaker Markit US Manf PMI that was expected to show 50.5 but came in at 49.9!  Below the magic 50.  And the Markit US Services PMI  - was expected to report 52.8 reported 50.9 and then the Kansas City Fed Survey which was -1 last month fell to -6 this month….so not the best data to date.  And in fact the weakness mimics what is happening in PMI’s around the world – (weakening)……and that caused futures to spike higher – WHY?  Because Bad news is Good news and that means that this bad news would give the FED cover to cut for sure in September and maybe even think about cutting more than the 25 bps that the mkt is pricing in…..……as the opening bell rang – the mkt surged with the Dow rising 186 pts and the S&P traded up 2939 before failing……remember – I have been saying that the 2925/2950 range is where we would be and where we would find resistance……and once again – we found resistance……by 11 am the indexes all reversed course and  - the S&P fell by 35 pts from high to low while the Dow  went from +186 to – 100……And why you ask would we see such a reversal??????

Back up…..the Jackson Hole Symposium……soon after the opening bell – CNBC ran with a number of interviews  - our friend Steve Lisman kicked it off with Kansas City’s Ester George – and she made it very clear – she was not a supporter of cutting rates in July and remains NOT a supporter of cutting rates in September – but that was ok (somewhat) because we KNEW that….but then Stevey got Philly’s Patty Harker on the hot seat and he was a bit more hawkish….saying that while he went along ‘somewhat reluctantly’ in July – he would like to hold rates steady for some a while now!  And then he said this:

“We’re roughly where neutral is. It’s hard to know exactly where neutral is, but I think we’re roughly where neutral is right now. And I think we should stay here for a while and see how things play out.” - Fed President Patrick Harker, August 22, 2019

And to add fuel to that fire – Dallas Fed President Bobby Kaplan also told Stevey Leisman that he would  “like to avoid cutting rates in September, but has an open mind”

And BOOM!   That’s it…..suddenly the path of lower rates has hit a pothole…..Because remember – you also have Boston’s Eric Rosengren on the opposition side of the argument which now makes 4 regional presidents voicing concern over lower rates……(Ester and Eric were the dissenting votes in July…..).  And when that happened – guess what else happened?  Yup…the YIELD CURVE INVERTED AGAIN….Oh boy……here we go. 

So yesterday the conversation centered around those interviews  along with others and today’s lineup is even more compelling because it begins with the Chairman – Jay Powell – taking the stage at 10 am est…..Now here is where it gets frustrating (for me) – there are some that are holding Jay Powell responsible for whatever happens today in the mkts……as IF the Jackson Hole Symposium is essentially a bigger press conference for US Fed policy –where he is supposed to outline day by day, minute by minute exactly what the FED is going to do otherwise the trader types and algo’s will throw a fit and stamp their feet like a 2 yr old……….Let’s be clear – That is NOT the point of this symposium…..….see the link here that defines the topic of discussion for the 2019 event.  (https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2019-about)  - What you should realize is that the boondoggle is not supposed to hold anyone’s hand and make sure that you are ‘OK’….. this isn’t a therapy session where you lie down on the couch and complain about how ‘Jay Powell hurt your feelings!’

So suddenly no one was talking about tax cuts, capital gains indexing, strong earnings or better guidance, trade talks or trade threats. By the end of the day after the mkt thrashed around – we ended essentially flat.  The Dow rose by 50 pts or +0.19%, the S&P fell by 1.5 pts or 0.05%, the Nasdaq lost 28 pts or 0.36% and the Russell gave up 3 pts or 0.25%. 

As expected Trump did not waste the opportunity to tell us what he thinks…..he spent time telling us that after Wednesday’s payroll tax cut /capital gains indexing conversation that sent the mkt higher - that we don’t need one – there is nothing wrong with our economy, in fact we have the strongest economy of any country in the developed world -  but that the FED and Jay Powell have no idea what they are doing…because they need to cut rates and cut them now…. because other central banks are cutting their rates. 

  It is clear that Donny is frustrated with the fact that the FED is an independent entity and he can’t control it – they have a mandate to maximize employment and keep prices stable/steady…..and if our macro data tells them to stay the course then they should stay the course….NO WHERE in their mandate does it say that the FED is in charge of holding anyone’s hand or setting policy based on what the algo’s want….Not at all…..I long for the days of Paul Volcker – a time when he managed FED policy and did not manage individual expectations of mkt participants.

They are expecting him to ‘right the wrong’ (I don’t think it was a wrong)  from last month – when he said that the cut was just a ‘mid-cycle adjustment’….. that is NOT on the agenda……but could he hint?  Yes….but my gut says that he won’t.  My gut says that he’ll try to stay away from anything that could create more angst and misunderstanding, BUT if he doesn’t address it then somehow he is sure to get mauled by the media …and then the algo’s will throw a fit and cause swift devastation that he then gets blamed for….it’s ludicrous…

Now the FED FUND futures are all calling for a 25 bps cut in September – ( 98% chance) – so I think that’s a done deal…..whether we need it or not – but the sense is that IF Jay Powell does not spell out exactly what he intends to do then the mkt will convulse…..I say – Let it convulse because the more we keep feeding the beast the worse it is going to get when the correction does come – because you know its coming and when it does prepare yourself for a swift and painful move. Again - Jackson Hole is NOT designed to pacify the algo’s or day traders at all….It is a much broader, methodical and educated conversation about the future role and challenges of Monetary Policy. – Period!

This morning US futures have been all over the place….down, up, and now trying to decide what to do next…….Dow futures are   up 70 pts, S&P up 7, Nasdaq is up 29 and the Russell is up 5….the mkt will remain focused on the yield curve and Jackson Hole..…..Global flash PMI’s while better than expected still remain below 50….and that puts them in contractionary mode…..US eco data yesterday was mixed…..better Init Jobless claims &  Cont Claims but weaker  US Manf PMI & US Services PMI  - which appear to be inline with what is happening around the world…..but it is not a reason to panic just yet…..there are still plenty of positive data points that offset yesterday’s data……

So watch the 10’s-2’s spread  while Powell is speaking …..that will tell us whether the speech is positive or negative for stock – although I think if you just listen to him and understand his words – you’ll be better prepared for what’s next.  For all of the BS – I think Powell is very clear when he speaks – it is the people in the room that twist his words that causes the angst…….  If Powell is dovish, then 10’s-2’s should widen out  and that will help stocks rally as it means that more cuts are coming….(exactly what the mkts want)   Conversely, if Powell is ‘hawkish’ (or NOT sufficiently dovish) then we can expect another inversion of the 10s’-2’s  which will cause an ugly reaction……(think convulse).    

The S&P is now in the 2925/2950 range….a range where I think it stalls….especially if Jay Powell says nothing……but if he does indicate that rates in the US will continue to fall – then watch for stocks to move higher…as the algo’s go all in…..and if that is the case – then we could see a spike up to 2950……Stay tuned.

Gold is backing off a bit  - this morning it is down $3 at $1,505….as investors have been taking profits after the recent spike higher…….it should find some support right hear as it also waits to hear what comes out of Jackson Hole….Geo-political tensions, ongoing trade war and falling rates will prove to support gold  - so let’s hear what Jay has to say ……

Asian mkts closed higher and European mkt are higher… all in anticipation of today’s speeches….and this weekend is the G7 meeting in France – expect a BIG NOTHING DONE.

 

Tagliata Fiorentina

There are only a couple of ingredients….Thin sliced rib eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.  

Just FYI – Grana Padano – is one of the most popular cheeses in Italy.  It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.

Season  your rib-eye with s&P and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.

Heat your grill – Place the rib-eye on the grill and sear for 3 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – but for this you should use a thin sliced rib-eye…..

Place on a warmed plate and cover with fresh arugula, chopped red onion (optional) and slices of the Grana Padano.  Serve immediately with a house Chianti.   There is no dressing on the arugula – this dish is about simplicity.