The Market Today

FOMC Minutes Show Confidence in New Policy Tools


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Initial Jobless Claims Pull Back Lower: Initial jobless claims for the week ending August 17 fell from 221k to 209k, more than reversing the previous week’s gains. There has been some analysis showing the recent tariffs have had an outsized impact on new claims in states heavy in manufacturing and agriculture.  The state-level data, in fact, show claims in Pennsylvania, Michigan, and Ohio down on a year-over-year basis.  Claims in Iowa and Wisconsin are up year-over-year, albeit only fractionally.

Markit PMIs, Leading Index, Regional Fed Report, Jackson Hole: At 8:45 a.m. CT, the Markit Manufacturing and Services PMIs are expected to show a mixed message in the initial August data.  The Leading Index is expected to tick higher at 9:00 a.m.  The Kansas City Fed’s regional manufacturing index is also expected to show a slight improvement at 10:00 a.m.  The biggest event of the week, the Fed’s annual retreat to Jackson Hole, kicks off tonight with a speech from Fed Chair Powell tomorrow at 9:00 a.m. CT.


TRADING ACTIVITY

Yesterday – Stocks Closed Higher Despite Curve Retesting Inversion After Fed Minutes Showed Powell Was Speaking For The Masses: Stocks gained Wednesday but closed off their highs after the Fed’s Minutes pushed yields up and the spread between the 2-year and 10-year Treasury yields into an intraday inversion for the third time since 2007. The S&P 500 gained 0.8%, with the recovery spread out across all 11 S&P sectors and consumer discretionary companies at the top for a second day. Shares of Target soared 20% to an all-time high after it followed Walmart’s lead from last week in posting stronger-than-expected current quarter results and lifting its guidance for the full year. While the latest tariffs announcement could crimp consumer spending, Target’s CEO said it’s “largely a 2020 issue.” Lowe’s stock was the second-best consumer stock behind Target, rallying sharply after it too beat analysts’ earnings expectations. A day earlier, Home Depot led the consumer sector on solid earnings. The daily uptrend for the major indices, however, was disrupted by the Fed’s Minutes which showed Powell wasn’t the only official who saw July’s rate cut as a “mid-cycle adjustment,” simply a “recalibration” of policy for risk-management purposes (more below). Stocks slipped from their intraday peaks and yields, led by the short end, popped higher and climbed into the close. The 2-year yield rose 6.1 bps to 1.573% while the 10-year yield added 3.4 bps to 1.589%. The spread between the two briefly inverted before closing in positive territory.

Overnight – Fed Officials Remain Divided Despite Deteriorating Trade Outlook Since July Rate Cut: Data overnight showed the global outlook remains uncertain against a backdrop of strained global trade relationships, key factors behind the Fed’s decision to cut rates in July (more below). Japan’s Ministry of Finance reported its all industry activity index dropped 0.8% in June, the seventh largest monthly decline of the cycle. Separately, a top manufacturing PMI for Japan inched up in August but signaled a fourth consecutive month of contraction. The Eurozone’s manufacturing PMI also strengthened unexpectedly in August but held below 50, a sign activity is slowing, for a seventh month in a row; PMIs for France and Germany both exceeded analysts’ expectations. The services PMIs were also better than expected. However, the 12-month outlook slipped to its weakest level since 2013. The mixed messaging should keep the attention of the ECB, which re-introduced an easing bias into its official policy statement in July. The minutes stressed the communications change “needed to strike a careful balance between” sounding “unduly negative” on the economy, while “effectively counteracting” concerns its monetary tools were ineffective to get inflation back to target. The Fed faces a similar messaging challenge following its first rate cut in a decade, a challenge complicated by continuous chatter from various Fed officials. After Kashkari from Minneapolis said yesterday he would argue in favor of another rate cut and stronger forward guidance, Kansas City Fed President George said July’s cut “wasn’t required,” adding “I’m not ready to provide more accommodation…without seeing an outlook that suggests the economy is getting weaker.” Treasury yields climbed to new intraday highs after her comments, pushing the 2-year yield up 1.8 bps and the 10-year yield 3.1 bps higher around 7:15 a.m. CT. Stocks futures held on to modest overnight gains.


NOTEWORTHY NEWS

Powell’s “Mid-Cycle” Characterization Was No Slip Of The Tongue: The Fed’s Minutes were made somewhat stale by a long list of domestic and global events that have transpired since they cut rates on July 31, including the sharp deterioration of trade tensions between the U.S. and China. However, the discussion did shed some light on the Committee’s mindset in thinking about the policy in the context of an increasingly uncertain outlook. The explanation of why they cut rates included the three main points Powell attempted to emphasize in his post-meeting press conference: a business-led slowing of the U.S. economy against a backdrop of a slower global pace; greater risks from global weakness and trade uncertainty; and to help inflation more quickly return to 2%. The Minutes showed that two officials had desired a 50-bp cut in order to boost inflation while several others, for various reasons, were in favor of no change. While the rate decision was divided, there were was more agreement that policy was not on a pre-set course. “Most” participants saw the July cut “as part of a recalibration of the stance of policy, or a mid-cycle adjustment,” that “should be viewed as part of an ongoing reassessment of the appropriate path of the federal funds rate that began in late 2018.” The Minutes showed that “Members generally agreed that it was important to maintain optionality,” a driving force behind the “contemplates” language added to the Statement “to underscore the…intention to carefully assess incoming information before deciding on future policy adjustment.” Away from the current discussion, the Minutes included a deep debrief of the 2008 crisis response which resulted in a self-graded A+ and a belief that “nontraditional policy tools” could be used “more aggressively” and “preemptively” in future downturns. The update on the ongoing policy review process included several possible options for adjusting the current framework, or makeup strategies that could help the Fed better achieve its inflation mandate.

Existing Home Sales Essentially In Line With Estimates In July: Existing home sales rose 2.5% as expected in July on gains in three of the four regions, including an unusually large increase for activity in the West. The overall pace of sales, however, slightly outpaced estimates because June’s decline was revised to be slightly smaller. The 5.42MM-unit pace last month was the best since February, and the second-strongest measure of activity since April 2018. The general improvement in existing sales mirrors the pick-up in the pending sales index that has unfolded as mortgage rates have declined.


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