The Fed. Did Something Change?
April 8 Market Recap – The Fed. Did Something Change?
The Markets Thought So.
Dow 34,721 (97) or (0.27%)
Nasdaq 13,711 (550) or (3.85%)
S&P 4,488 (57) or (1.25%)
USD10Y 2.713% +33.6 bp or +14.1%
The Fed. Did Something Change? The Markets Thought So.
As expected, the Fed and the minutes from their March meeting dominated the headlines this week. On Tuesday, Vice-Chair Nominee Brainard stated that the Fed would begin to rapidly unwind its nearly $9 trillion balance sheet. This would have the effect of pushing rates higher in conjunction with the Fed’s rate hikes. Understandably, markets fell on the hawkish comments. On Wednesday, the Fed’s March meeting minutes were released, and it was learned how and by how much the balance sheet would be reduced. While the final decision will be made during the May 3 and 4 meeting, it appears that up to $95 billion will be allowed to roll off the balance sheet starting in May and maxing out to the full $95 billion in June. The question remains, why did the markets react as strongly as they did to these announcements? The $120 billion Asset Purchase Program was reduced by $15 billion/month starting last fall. The reduction was then accelerated to $30 billion less per month starting in December and the last purchases were made last month in March. Thus, unless the Fed has a different purchasing facility by which they are replacing maturing assets every month in order to stay neutral in the marketplace, nothing has changed. Assets are maturing and rolling off the balance sheet every month. The markets reacted as if the Fed announced that they were going to actively sell assets in the marketplace, not passively allow maturing assets to roll off and not be replaced. More to come on this subject…
The government of Ukraine is still intact and in command of its armies which are still very much alive and fighting in the field. A U.S.-based military think tank, the Institute for the Study of War published the following on April 9…
- Russia is unlikely to be able to mass combat power for the fight in eastern Ukraine proportionate to the number of troops and battalion tactical groups it sends there.
- The Russian military continues to suffer from devastating morale, recruitment, and retention problems that seriously undermine its ability to fight effectively.
- The outcome of forthcoming Russian operations in eastern Ukraine remains very much in question.
Minding the Twos and Tens
With the advance of the 10-year Treasury yields due to the comments of Fed officials this week, the yield curve reverted to a positive slope and widened to a 19bp spread, the widest it has been since March 25th.
In a worrying development, infections flattened out last week and increased this week. While hospitalizations and deaths continue to plummet, they are lagging indicators and infections and hospitalizations are increasing in the Northeast.
While it is a short trading week due to the markets observing Good Friday, it is a week chock full of economic data and the start of the Q1 earnings season. Core CPI will be the headline event on Tuesday and then the banks and brokerages kick off the earnings season on Wednesday.
Market Data Points Next Week
- Monday – Fed Presidents Evans (Chicago) and Bostic (Atlanta) speak. Fed Governors Bowman and Waller attend the “Fed Listens” event.
- Tuesday – March Core CPI, Richmond Fed President Barkin and Fed Governor Brainard speak.
- Wednesday – March Final PPI. Earnings: JPMorgan Chase (JPM) and BlackRock (BLK), Delta Air Lines (DAL).
- Thursday – Initial Jobless Claims. March Retail Sales. April University of Michigan Preliminary Consumer Confidence. Fed Presidents Harker (Philly) and Mester (Cleveland) speak. Earnings: Citibank (C), Well Fargo (WFC), Morgan Stanley (MS) and Goldman Sachs (GS).
- Friday – Empire State Manufacturing. Markets closed in observance of Good Friday.
April 8 Market Recap Trading…
Monday – Dow +103 to 34,921, Nasdaq +271 to 14,532, S&P +36 to 4,582, USD10Y 3.5bp to 2.412%
- Only four of the eleven S&P sectors traded higher today led by Consumer Discretionary, Communication Services, and Technology.
- The yield curve continued to be inverted although the gap closed to 0.01% with the US2YR at 2.422% vs the US10YR at 2.412%.
- Twitter (TWTR) surged 27% after a regulatory filing revealed Elon Musk as the company’s largest shareholder with 9.2% position.
Tuesday – Dow (280) to 34,641 Nasdaq (328) to 14,204, S&P (57) to 4,525, USD10Y 14.4bp to 2.556%
- Markets fell today as Fed Vice Chair Nominee Lael Brainard stated the Fed would begin rapidly reducing its balance sheet starting in May. This will have the effect of further tightening the money supply and adding additional upward pressure to interest rates.
- Only four of the eleven S&P sectors traded higher today led by defensive sectors Utilities, Health Care, and Consumer Staples.
- Crude prices fell 3% and closed around $100/bbl (WTI).
- The move in the US10YR today flipped the yield curve from inverted to positively sloped. The yield sits 2.2bp above that of the US2YR.
- Twitter (TWTR) jumped another 2% today after the company announced that its newest, largest, shareholder, Elon Musk, would be joining its board.
Wednesday – Dow (144) to 34,496, Nasdaq (315) to 13,888, S&P (44) to 4,481, USD10Y 5.3bp to 2.358%.
- The story of the day was as expected, the Fed and the minutes from their early March meeting. Several members argued for a 50 bp rate hike in March which almost assures a 50 bp hike at the early May meeting and brings another 50bp hike into play for the mid-June meeting. Further, the board agreed to allow up to $95 billion of assets that are maturing to roll off the balance sheet each month thus beginning the process of reducing the Fed’s $8.5 trillion balance sheet.
- Crude oil continued its slide as the International Energy Agency announced it would release 120 million barrels into the marketplace. WTI traded down 5% to $97.09/bbl.
- Only five of eleven S&P sectors traded higher today led by Utilities, Health Care, and Real Estate.
- The Dow Transportation Average (DJT) officially slipped into bear market territory today as it is now more than 20% off its high set in November of 2021. The average is made up of 20 airlines, railroads, and trucking stocks. The fear is that if these companies which move people and goods around the world are faltering, the rest of the economy will follow. Along with the recently inverted yield curve, this is something to monitor.
Thursday – Dow +87 to 34,583, Nasdaq +8 to 13,897, S&P +19 to 4,500, USD10Y +4.3bp to 2.652%.
- Seven of eleven S&P sectors traded higher today led lower by Health, Energy, and Consumer Staples.
- Jobless claims came in at a 52-year low of 166,000 claims vs estimates of 200,000 and last week’s greatly revised lower 171,000 reports (originally reported as 202,000 claims). Continuing claims increased to 1.52 million people.
- WTI traded down slightly to $96.03/bbl.
- The continued advance of the US10YR yield increased the spread between the 2s and 10s to 0.19%
- HP Inc. (HPQ) jumped 14.75% after it was revealed that Warren Buffet’s Berkshire Hathaway had taken an 11% stake in the company.
Friday – Dow +137 to 34,721, Nasdaq (186) to 13,711, S&P (11) to 4,488, USD10Y +6.1bp to 2.713%.
- Seven of eleven S&P sectors traded higher today led by Energy, Financials, and Health Care. Technology was the worst performer, down 1.43%.
- WTI Crude Oil traded higher by 2.32% to $98.26/bbl.
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