The Market Today

Fed Conducts Further Weekly Purchase Operation as Officials Explain Their Dissents


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Fed Officials Give Their Take On Wednesday’s Decision: Friday’s schedule of events appears relatively quiet, although recent history would advise to expect the unexpected. The economic calendar is light but includes scheduled comments from three separate Fed officials, two who voted on Wednesday’s decision and another who will vote on decisions beginning next year.

Fed’s Williams: New York Fed President Williams, who voted in favor of Wednesday’s cut, will give a presentation early Friday morning in Switzerland.

Fed’s Rosengren: Boston Fed President Rosengren, who dissented in favor of leaving the target rate unchanged, will speak at 10:20 a.m. He released a statement this morning explaining his dissent. Rosengren wrote, “The stance of monetary policy is accommodative. Additional monetary stimulus is not needed for an economy where labor markets are already tight, and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage. While risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless.”

Fed’s Kaplan: Dallas Fed President Kaplan will roll onto the voting committee next year and will participate in a moderated Q&A session at noon CT.

Fed’s Bullard: Already this morning, St. Louis Fed President Bullard, who dissented in favor a larger 0.50% cut this week, released a statement explaining his dissent. He noted, “there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.” Additionally, inflation remains below target and market inflation expectations are running uncomfortably low. As a result, “It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize.”

Household Change In Net Worth: At 11 a.m. CT, the Federal Reserve will release its report of Household Net Worth for the second quarter.


OVERNIGHT TRADING ACTIVITY

Hopes For A Calm Close To Chaotic Week: Friday’s overnight session has so far been tame as global markets look to end a week filled with unexpected excitement on a relatively calm note. Wednesday’s Fed announcement was expected to be the focus of the week, but was upstaged early by an attack on Saudi’s oil operations and surprise turmoil in overnight funding markets. Those developments led to the biggest intraday gain for oil since 1991 and the first Fed overnight repurchase operation in a decade.

China’s Lower Its LPR, Japan’s Inflation Slows: Stocks were generally stronger across both Asia and Europe and U.S. futures had edged into positive territory before 7 a.m. CT. Sovereign yield curves were generally flattening with higher shorter yield and lower longer yields, although the moves were notably modest. China lowered its one-year loan prime rate by 0.05% to 4.20% while keeping the rate for five-year lending unchanged at 4.85%. The loan prime rate became a focus back in August when the PBOC announced it was revamping the rate in order to improve the transmission of stimulus into the real economy. Also in Asia, data showed Japan’s core inflation rate dipped to 0.5% YoY, the lowest in more than two years. The Bank of Japan decided to keep rates unchanged yesterday, but hinted it could ease policy at its next meeting in part because its worried inflation could lose momentum toward its target.

Fed Will Be A Focus Friday: Although the Fed’s decision has come and gone, the U.S. central bank will remain a focus on Friday. The Fed’s fourth overnight repurchase operation was fully allotted and there continues to be debate about the need for a more permanent fix. Several Fed officials are also expected to make remarks today, likely giving their take on Wednesday’s decision and the outlook. Just before 8 a.m. CT, the 2-year Treasury yield was unchanged while the 10-year yield drifted 0.9 bps lower.


YESTERDAY’S TRADING ACTIVITY

Stocks Erased Early Gains To End Unchanged: Helped out by strength across Europe, the S&P 500 opened stronger and climbed as much as 0.5% around mid-morning. However, the index turned lower just before lunch and slowly erased its gains to finish unchanged. The Dow notched a 0.2% loss while the Nasdaq managed a small 0.1% gain. Within the S&P 500, health care companies led gains across six sectors while industrial led losses for a second day. Financials also reversed yesterday’s post-Fed gains as Treasury yields unwound a portion of yesterday’s rise.

Slower News Cycle With Conflicting Signals On Trade: In a comparatively quiet day for news headlines, the OECD cut its 2019 growth forecast from 3.2% to 2.9% and there were a couple of conflicting developments on trade. White House adviser Kudlow said there has been a “little softening” in the mood at this week’s meeting of mid-level trade officials. However, another adviser to the president, Michael Pillsbury, said the current tariffs “could to go 50% or 100%,” according to the South China Morning Post.

Yields Edged Lower: Yields still managed to climb off their lows, with the 2-year yield closing 2.4 bps lower at 1.74% and the 10-year yield down 1.2 bps at 1.78%. After twenty-four hours to digest the Fed’s decisions, the fed funds futures were pricing in just under a 50% chance of another cut in October, but a 100% chance of 25 bps of easing between now and the end of the year.


NOTEWORTHY NEWS

Existing Home Sales Rose Unexpectedly: Existing home sales rose unexpectedly in August on positive gains across three of the four geographic regions. The 1.3% gain was two full percentage points stronger than expected and lifted the annualized sales pace to 5.49MM units, its best level in 17 months. Existing sales have recovered gradually throughout the year after falling to a more-than-three-year low in January, helped out by slowing price gains and falling mortgages rates. Freddie Mac’s 30-year survey rate fell to as low as 3.49% in early September, down 1.45% since November. However, the outlook moving forward faces some headwinds. The median price was 4.7% higher than a year ago, a larger increase than in August, while mortgage rates have pushed off their lows as Treasury yields have reversed higher. Additionally, pending home sales were weaker in July, pointing to a possible weakening of existing sales in the months ahead.


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