Home Morning Commentary

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Yesterday I wrote, “The Federal Open Market Committee (FOMC) is scheduled to announce its policy decisions on Wednesday September 20th. Over the last two trading sessions, the markets have been docile ahead of the announcement.”  Well, considering how a normal FOMC announcement moves the market wildy, I would say that Wednesday was yet another docile trading day with very low volume.

Today Janet Yellen said that the FOMC would not raise interest rates with a 0.25% hike, but would stop using interest that its massive supply of bonds were earning to buy more bonds.  In other words, she announced the complete end of Quantitative Easing (QE) and the beginning of Quantitative Tightening (QT).  The teflon market yawned yet again; it was mostly docile once.

Part of the FOMC statement: Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.”

In fact, it was so lame that Reuters reported something appropriate: Financial markets were barely moved by the Fed decision and the new economic projections and based on the immediate market reaction it looked as if the Fed was right when it said that the portfolio runoff would be as exciting as ‘watching paint dry’.”

Will there be real action Thursday?  Was it just delayed a day?

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The Federal Open Market Committee (FOMC) is scheduled to announce its policy decisions on Wednesday September 20th. Over the last two trading sessions, the markets have been docile ahead of the announcement. While Hurricane Maria is still a major concern as we await the damage is will cause in Puerto Rico, the FOMC meeting has clearly taken center stage. Even potentially alarming comments by President Trump regarding possible military conflict with North Korea did not move the markets at all, so clearly traders don’t believe there is much else to focus upon at this time.

At present, the markets are pricing in a slightly better than 50% chance that another rate hike will occur by the end of 2017. More importantly at this point is the expectation of a formal announcement by the FOMC of reduction in its current balance sheet. This will be a monumental development considering that the Fed has been committed to bond purchases since the financial crisis of 2008-2009. Other central banks globally are still committed to quantitative easing policies, so there may not be a great of a response by the market if this announcement does indeed occur. Lastly, traders are still looking for a signal as to whether or not Janet Yellen will renew her position as FOMC chairperson after her current term expires in February 2018. With all of these things in mind, Wednesday is looking to be a volatile day.

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The markets were fairly calm on Monday as traders focused on upcoming economic decisions from the Federal Reserve, as well as kept an eye on the progress of hurricane Maria. Volumes for the SPY etf, which tracks the S&P 500 index, were lower than the recent average, a pattern that we have seen multiple times over the last few months. However, we can expect an increase in volume and volatility this week as the markets respond to the impacts of potential devastation to Puerto Rico from Hurricane Maria, as well as the outcome of the FOMC meeting scheduled for Wednesday of this week.

With a currently active hurricane season that has already seen strong damage in Texas and Florida, it seems that the US will have more budget overruns as Congress may need to approve yet another recovery package. Hurricane Maris is currently a category 5 hurricane, and thus would cause severe devastation if it makes landfall on Puerto Rico. Fortunately, the storm is not expected to impact the mainland United States.

As far as the FOMC is concerned, it seems like the odds are 50/50 that a rate hike is coming. My guess is that we will not get a clear statement of intent on Wednesday, thus leaving the door open to a possible hike in December. However, it seems that most market participants are convinced that no hike will come on Wednesday. We’ll keep an eye on these two developments this week.

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North Korea is back in the news, because it wasn’t in the news over the weekend.  What I mean is, because North Korea did not test fire another I.C.B.M. during the weekend, its inactivity has led to an equity rally as I type this Sunday evening.  Since it is the lack of activity by North Korea that caused the price movement, it is back in the news.

The lack of action by the North Koreans is good news, but may temporary.  The US is pushing for new sanctions against the regime this week, and it may be at that time that Kim Jong-un fires another I.C.B.M.  

The response to the potential sanctions was expected: Warning Washington it said that if it did “rig up the illegal and unlawful ‘resolution’ on harsher sanctions, the DPRK shall make absolutely sure that the U.S. pays due price.” The said “the forthcoming measures to be taken by the DPRK will cause the U.S. the greatest pain and suffering it had ever gone through in its entire history. The world will witness how the DPRK tames the U.S. gangsters by taking (a) series of action tougher than they have ever envisaged.”

This could lead to an interesting week.  Be prepared for more volatility.

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Apple stock has been weak for a few days and the new news certainly won’t help much going forward.  But don’t get too concerned just yet, it’s only down a few days from its all-time high.  If the reported glitch, however, turns into a larger news story, it could get worse.

So what’s the deal?  “Production glitches.”

As reported by the WSJ:  Apple Inc.’s new iPhone, which is expected to be unveiled Tuesday, was plagued by production glitches early in the manufacturing process this summer, according to people familiar with the situation, which could result in extended supply shortfalls and shipping delays when customers start ordering the device later this month. New iPhones are typically in short supply when first released. But if shortfalls of the new phone extend beyond the initial sales period, which is expected to begin September 22, they could weaken analysts’ and investors’ projections for sales in the crucial holiday period.

The production glitches led to a setback of about a month in the manufacturing timetable. Foxconn Technology Group, the Apple contractor that assembles iPhones, has been ramping up production at its manufacturing complex in Zhengzhou, China. The company is paying bonuses to employees who can help bring new hires on board at its Zhengzhou plant, which Foxconn said in June employs about 250,000 people.

Surprisingly, the Mouse in the south has problems too, and not just the coming financial losses it will take from hurricane Irma. At the BofA Media Communications Conference in NY, Disney CEO Bob Iger said its outlook was much worse than The Street was expecting and this year’s earnings will be in line with last year’s earnings.  What? No profit increase? Boooo!

With that, DIS plummeted about 4%.  But don’t worry, the markets will be open again another day, which is all any stocks needs to go up again.

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The markets were able to recover some of the prior day’s losses due to what sounds like de-escalation of the North Korean affair (for now) and what politicians always do when it comes to a tough economic issue: kick the can down the road.  Two developments like this on the same day would always help markets rally.

While president Trump was leaving the White House, a reporter asked a qn that is on everyone’s mind: “will there be military action in North Korea?”  His response was tweeted by the reporter as such…

  • TRUMP: WILL HAVE TO SEE WHAT HAPPENS WITH NORTH KOREA
  • TRUMP: MILITARY ACTION IN NORTH KOREA NOT FIRST CHOICE

With that, the US markets staged a slow but steady rally for four hours.  It was so slow and steady, it seemed surreal.

How did the S&P500 remain in such a sloth-like march higher?  That’s where part II comes in: Kick the can down the road.  The Democrats came to a deal with president Trump that was once again tweeted and moved the markets (higher of course):  TRUMP SAYS ‘WE ESSENTIALLY CAME TO A DEAL’ WITH DEMOCRATIC LEADERS AND ‘I THINK THE DEAL WILL BE VERY GOOD’

The debt ceiling “deadline” has been moved to the middle of December.  In the meantime, Congress will spend without a thought to the new pile of debt and without even considering a balanced budget.  

Come mid-December, one wonders if the same will happen.

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The US markets were bearish yesterday as traders digested the impact of several events. First we have the situation with North Korea, which has yet to be resolved and is likely to escalate further unless a breakthrough in negotiations occurs, but as this point that seems unlikely. Also the coming impact of hurricane Irma could be devastating as the storm has now reached category 5 status and is also the strongest recorded Atlantic storm in history, with the potential of becoming even stronger still depending upon the path it ends up taking. But as long as it hits the  United States at its current strength, widespread devastation is clearly going to occur. It can only be hoped that the storm will lose momentum or fail to hit the continental US. And then we have the comments from FOMC members. Governor Kashkari’s statements suggested that the FOMC raised rates too quickly and that the economy may have suffered as a result. FOMC members also showed caution in their inflation expectations.

The other major topic was the repeal and potential replacement of DACA. As was expected, the White House moved to end the Obama-era program and leave it to Congress to decide if it is to be continued. President Trump and Attorney Sessions argued that the policy had been adopted by circumventing Congress in the first place, and therefore it was prudent to push the decision back to Congress to reach a new bill or end the entire program within 6 months. Some analysts speculated that this decision would potentially drain the US economy of as much as $400 billion over the next decade. This potential loss of course is not due to the expense of removing people, but rather is projected as a potential cost of losing the jobs these people are currently engaged in as well as potentially not being able to replace those workers. However, it should also be noted that other immigrants or current citizens or legal residents could replace those who might ultimately have to leave. But clearly the decision creates uncertainty, and thus more volatility. We’ll keep an eye on all of these things for further developments.

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The Labor Day weekend was certainly a great time for many Americans, but not for all. The historic floods in southern Texas have left many residents devastated, as rescue operations continue. However, while the situation in the United States has been mostly positive over the holiday weekend, global tensions have escalated once again as North Korea apparently has detonated its most powerful weapon to date. The regime claims that the weapon was a fusion device, although it is impossible to verify if this indeed is true.

Nevertheless, the United Nations and leaders of its member nations are in agreement that this constitutes a major crisis, and are now pushing of further sanctions. Russia, in contrast, has argued that sanctions are useless and that military escalation would likely lead to catastrophe. However, this seems to be understood by all parties involved to some extent, but that the US and other nations are not willing to accept the reality of a North Korea becoming capable of launching an intercontinental nuclear attack. We can expect tighter sanctions for now, but the possibility of military intervention seems stronger than it has since the Korean War. The VIX is set to open about 12% higher, and the US equities are poised to open lower. Let’s keep an eye on this situation as more volatility now seems almost certain.

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The government will releases it’s non-farm payroll report Friday morning. This report used to be one of the most important data to be released each month, but as time rolls on things change, and one change is that this report has lost some of its luster.  The financial media still talks it up, and maybe it will become important again – like friday morning – but as of now, I’m not expecting it.

Bloomberg’s estimate: Nonfarm payroll growth has been on a 2-month surge, rising 209,000 in July following a 231,000 gain in June. Forecasters are looking for cooling in August where Econoday’s consensus is 180,000. The unemployment rate is seen steady at 4.3 percent while average hourly earnings are not seen repeating July’s respectable 0.3 percent showing, called instead at a 0.2 percent gain. In an offset, however, year-on-year earnings are seen rising 1 tenth to 2.6 percent. Other calls are for a 180,000 rise in private payrolls, a 9,000 gain for manufacturing payrolls which would be on top of July’s 16,000 surge, and no change in the workweek at 34.5 hours.

Goldman is expecting a worse data point: We estimate nonfarm payrolls increased by 160k in August, below consensus of +180k and the 3-month average pace of +195k. Our forecast reflects somewhat more mixed labor market fundamentals and a drag from residual seasonality, as first-reported August payroll growth has been consistently weak in recent years. We expect household job growth will be sufficient to leave the unemployment rate unchanged at 4.3%, but due to particularly unfavorable calendar effects, we estimate a 0.1% monthly rise in average hourly earnings (+2.5% year-over-year). While we believe payrolls and average hourly earnings are both likely to miss consensus estimates, we think the employment report may be somewhat less important than usual for the monetary policy outlook, because 1) recent data have been firm so we have some room for a miss, 2) the August seasonal issue is now well known so even a somewhat larger miss may not significantly alter the staff view, and 3) there are several months between now and December to make up for any weakness in tomorrow’s report.

The jobs data are released well before the NYSE opens so any unusual activity at the open may be due to it.  The WILD market action that used to occur after this report, however, may be long gone.

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While the situation between the United States and North Korea remains tense, fears have clearly waned as the volatility index mostly faded lower on Tuesday. The VIX, which is an index of options volatility premium for the S&P 500, fell from it’s opening at 13.57 yesterday to close at 11.76. The Trump administration is currently busy dealing with the aftermath of record flooding in southern Texas, and it is also unlikely that major decisions on action towards North Korea will be made before Congress returns from recess. However, the situation with North Korea is far from finished and we can expect more volatility in the markets going forward.

The S&P 500 meanwhile responded positively on Tuesday after gapping lower overnight, to recover all of its losses and close up 0.08% for the session. This again demonstrates the high degree of market confidence as economic data continues to show positive momentum in consumer confidence, although the stagnation in the US government in enacting tax reform, etc., has kept the S&P 500 range bound at or below all-time highs. In addition, trading in the VIX has recently spiked as traders clearly are expecting more volatility to enter the markets. This probably can be seen as a positive as it should create more trading opportunities for active traders, given the tight ranges that we’ve seen persistently since the beginning of this year. We’ll keep an eye on North Korea and other news to see what to expect next.

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