After listening to Fed Chair Powell’s press conference and reviewing today’s news release and supporting documents, we have 3 takeaways from today’s FOMC meeting:
#1: Chalk up another win for the Fed Drift on quarterly releases of the central bank’s economic projections, although it is slim victory for US stocks and results are still incomplete:
In its latest iteration, the Fed Drift is the propensity for the S&P 500 to rally from the open on the day before a monetary policy announcement through the close of the day after a meeting where the Fed releases a new SEP (Summary of Economic Projections).
As we outlined yesterday, the “Drift” has worked well in 2019. The March, June and September meetings all saw the S&P 500 rally across the timeframe noted in the previous point.
The S&P 500 opened yesterday at 3135.36 and closed today at 3141.63, up 0.2%. That’s well less than the average 3-day “Drift” this year of 0.8%, but we still have tomorrow’s action to evaluate.
Conclusion: there was very little “new” in today’s release and press conference, but the revised SEP still helped lift stocks, so let’s see why…
#2: The most eye-catching line of the SEP was the projected path of Fed Funds policy rates created by the “Dot Plot” estimates supplied by committee members:
The current consensus calls for Fed Funds to remain stable through 2020 at 1.6%.
Even in 2021 committee members in aggregate only see 1 rate increase, taking Fed Funds to 1.9%.
Worth noting: a statistical analysis of the “Dots” shows the committee is largely of one mind on keeping rates steady in 2020. The standard deviation of their guesses is just 0.11, less than half the year-ago levels of certainty about rates in 2019 (0.26). In fact, the Fed has never been more certain about December’s forward-year rate policy since they started releasing the “Dots”.
Chair Powell’s press conference mirrored this institutional conviction at almost every turn, albeit with a dovish tilt. He sees wage growth constrained by slack productivity growth, only a “faint” relationship between labor market utilization and inflation, and little need to take back 2019’s rate cuts in 2020 (unlike 1998). Moreover, he believes there is still substantial slack in the US labor market and worries more about the Fed losing credibility regarding its 2% inflation target than overshooting it.
Conclusion: the Fed wants to portray itself as 1) solidly in lockstep that rates are appropriately set for the year ahead and 2) biased to ease if measured inflation remains below their goal, which explains why markets are betting their next move is a cut, but not soon…
#3: Fed Funds Futures slanted their bets about a 2020 rate only modestly after the Fed’s announcement, and mostly for the back half of 2020:
Odds that the Fed keep rates unchanged in Q1: 83.1% today, 81.1% yesterday.
Odds that rates will be unchanged through Q2: 62.3% today, 63.1% yesterday.
Futures currently think the odds are strongest that the Fed will end 2020 with rates either where they are now (37%, but down from 41% yesterday) or 25 basis points lower (39% today, 38% yesterday).
Conclusion: yes, markets agree with the Fed that rates are by and large set correctly, but also think easing is the “real” base case. Let’s face it: just one rate cut next year (the modal guess in December 2020) is unlikely if only because the Fed won’t think it has the credibility to fine-tune policy that way. Markets know that, so pricing in one cut just means that they think the Fed will have to respond to slowing economic growth in 2020.
Summing up: the Fed says they’re done for now, but markets say there’s still more work to do.
Given that Fed Funds Futures have had a better call than the policymakers, we’re going with the market’s prediction for 2020.
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During Christine Lagarde’s first press conference as ECB President she dropped a couple of statements that simpoly need to be addressed for their “error”-ness…
First, the former IMF head proclaimed confidently that “the Euro are is not seeing Japanification.”
We beg to differ…
And second, Lagarde confidently told the listening audience that “negative rates seem to work” even though she admitted that “the ECB is very aware of the side effects.”
“Negative interest rates are crazy. That means money is not worth anything anymore,” Gruebel exclaimed.
“As long as we have negative interest rates, the financial industry will continue to shrink.”
The ECB’s imposition of negative interest rates have created an “absurd situation” in which banks don’t want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates.
Additionally, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.
“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.
Another cut “may make refinancing cheaper for states, but has grave side effects.”
While Lagarde has previously claimed that the benefits of deeply negative rates outweigh the costs (reaffirming today that “a highly accommodative policy is warranted for a prolonged period of time”) few economists believe another cut at this level would actually help the economy. According to Sewing, all it would achieve is to further divide society by lifting asset prices while punishing Europe’s savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates.
“What’s really worrisome: central banks have hardly any tools left to effectively mitigate a real economic crisis,” Sewing said.
“They have already cranked open the money tap – most of all the European Central Bank.”
Who can blame them when you look at their share prices.
All of which reminds us that “…when it’s serious you have to lie…”
“Aramco At The Top Of The World” – Second Day Of Trading Briefly Tops $2 Trillion Valuation
Saudi Aramco shares gapped up sharply on the second trading session, with the state-owned oil company hitting Prince Mohammad Bin Salman’s (MbS) $2 trillion valuation target, reported Bloomberg.
Shares jumped almost 10% in the first 90 minutes of trading Thursday, breaching the 37.51 SAR, the level which values Aramco over $2 trillion.
Gains in the session above $2 trillion in valuation was hard to justify for the market as prices faded in the back half of the session and closed at 36.75 SAR, or below MbS’ target.
Source: Bloomberg
Aramco shares soared limit-up on IPO day, Wednesday, reaching a valuation of $1.88 trillion, higher than any other publicly traded company in the world. We explained how leading up to the IPO, Saudia Arabia engineered the mechanics to orchestrate a massive stock pump.
Since Aramco only sold a tiny 1.5% sliver in the company, the kingdom’s Public Investment Fund (PIF) could easily manipulate the price with such a small fraction of the public stock. On top of that, since many foreign institutions disagreed with valuations, and overlooked the deal, the kingdom encouraged the county’s wealthiest families to buy stock and offered cheap loans for purchases.
Analysts at Sanford C. Bernstein & Co. warned that investors need to cash out of Aramco because of valuations concerns.
Several months ago, Wall Street banks valued Aramco at $1.2 to $1.5 trillion, now trading around $2 trillion.
The kingdom’s stock pump has artificially boosted valuations of Aramco that are likely not to be sustained, but, in the meantime, it makes for good press in Saudi papers.
Some local media outlets said, “Aramco at the top of the world” and “A dream come true.”
Bernstein analysts disagreed on valuations but didn’t dispute the fact the company is the “most profitable oil company in the world.”
However, macroeconomic headwinds of a slowing global economy, dropping Chinese demand and declining fuel consumption across the world could put down pressure on oil prices, resulting in lower Aramco valuations.
Finally, for those who are exuberant about this state-owned energy company’s massive valuation, don’t forget what happened the last time a gigantic energy firm came public at over $1 trillion market cap…
Gold & Silver Extend Gains On Lagarde’s “Inflation Is Coming” Comments
With the dollar sliding, and following yesterday’s dovish market reaction to The Fed, ECB’s Lagarde comments on inflation (increasing its expectations for 2020) and noting labor costs pressures have strengthened. Additionally, she noted The ECB’s highly accommodative stance will continue for a prolonged period until inflation rises, and said that incoming economic and survey data point to some stabilization in the slowdown of economic growth in the euro area.
Gold and silver have erased all the post-Payrolls losses…
Even BLS Confused After Jobless Claims Unexpectedly Soar Most In Over Two Years
In addition to the surprising miss in PPI, which may rudely awake the Fed out of its “no rate cut for a year” slumber, moments ago the BLS reported a shocker, when the latest weekly initial jobless claims soared unexpectedly by 49K, from a near-cycle low of 203K to 252K, far above the 214K consensus expectations, and the highest print since 2017!
This was the biggest monthly jump since September 2017, however back then there was a reason: hurricanes; this time there was no immediate explanation for the sudden spike, although the Labor Department did note that volatility is “not unusual” around the Thanksgiving holiday.
And while it is likely that there was a big seasonal reason for today’s jump, it was not immediately clear what it is, especially since it should have been factored in the expectations as it is recurring every year. Meanwhile, looking at the unadjusted data, the number was even more jarring, rising by a whopping 100,697 claims in the week to a total of 317,509 in the week ending December 7.
As even the BLS admits, “the seasonal factors had expected an increase of 39,217 (or 18.1 percent) from the previous week. There were 261,525 initial claims in the comparable week in 2018.” That said, it is possible that the spike may be due to seasonal layoffs coming in early this year, although in prior years this spike usually took place later in December.
A breakdown by state did not provide color on what caused the spike: the largest increases in initial claims for the week ending November 30 were in Ohio (+1,504), Iowa (+1,194), Arkansas (+815), Oklahoma (+811), and Wisconsin (+733), while the largest decreases were in California (-12,676), Texas (-5,780), New York (-5,471), Florida (-1,845), and Georgia (-1,819).
We look to Larry Kudlow for color on what snapped in the first week of December, as left without an explanation the unexpected surge in claims is certainly an ominous inflection point for the state of the US labor market.
US Producer Prices Grow At Slowest Pace In Over 3 Years
Following yesterday’s bigger than expected rise in consumer prices (driven by surging services costs), US producer prices were expected to accelerate after slowing dramatically in recent months, but it didn’t with core PPI dropping 0.2% MoM and headline PPI holding at just 1.1% YoY – the lowest since September 2016.
Source: Bloomberg
Core PPI fell 0.2% MoM – dispelling more of the narrative that President Trump’s tariff threats will crush the average American with cost increases…
Source: Bloomberg
Notably, while Consumer Services costs surged in November, Producer Services costs slid 0.3% (with Trade -0.6%).
Watch Live: Christine Lagarde’s First Press Conference As ECB President
Having got through the ECB statement release unscathed with no changes or surprises, all eyes are now on Christina Lagarde’s first press conference appearance as ECB president.
The focus will fall on how Lagarde intends to run the central bank, and its upcoming strategic policy review, which will likely be formally announced at the December confab; but there is a risk that this meeting will be light on details, which may possibly result in horizontal price action. Many believe Lagarde’s first task will be uniting a divided Governing Council, where there are mixed views on the efficacy and risks of loose(r) policy, as well as the practicalities of the ECB’s decision-making functions.
Lagarde is also expected to reiterate her call on fiscal authorities to do more to support the Eurozone economy. Elsewhere, updated economic projections may see near-term growth forecasts nudged up slightly, though further forecasts are subject to downside risks; inflation forecasts are seen little changed.
Today’s press conference may reveal more information about this, and could come with a formal announcement on the review. And among many other policy/mission tweaks for the convicted criminal-cum-central banking climate crusader, Rabobank sarcastically adds, “will it include a pledge to also do ‘whatever it takes’ to get to the Eurozone to net-zero carbon emissions?“
Apple Shares Slide After Credit Suisse Reports Plunge In China iPhone Shipments
Apple share were already sliding in the pre-market session as tariff fears re-emerged but a report from Credit Suisse that iPhone shipments fell meaningfully in November sparked considerably more selling pressure.
In fact, CS says iPhone shipments in China dropped a shocking 35.4% YoY in November (following a 10.3% YoY drop in October). This compares to a 0.2% increase in the broader regional smart phone market. Additionally, CS reports that total shipments in China are now down 7.4% since the launch of the iPhone 11 line.
Luckily, Apple stopped reporting iPhone unit sales so this will soon be forgotten (or not).
No Changes Or Surprises From ECB In Lagarde’s First Meeting
In her first policy meeting as head of the ECB, Christine Lagarde left the uber-dovish momentum put in place by her predecessor, Mario Draghi, untouched, and moments ago the ECB kept all its three rates unchanged as expected, noting that rates would remain “at their present or lower levels” until the ECB nears its inflation goal, i.e. never, and that the ECB will continue buying €20BN in bonds until “shortly before it starts raising the key ECB interest rates” (or until it runs out of German bonds to buy, whichever comes first). In short no surprises, and the market reacted accordingly, with the EURUSD and bunds not even pretending to move.
Full statement below:
At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
On 1 November net purchases were restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
And now attention turns to Lagarde’s first press conference and – in continuation of a trope started under her predecessor – what color tie she will be wearing (we jest; we know the only accessory with her will be her money-printing Berkin). As a reminder, in her first speech, Lagarde stated that the ECB’s strategic review would begin soon.
As such, today’s press conference may reveal more information about this, and could come with a formal announcement. And among many other policy/mission tweaks for the convicted criminal-cum-central banking climate crusader, Rabobank sarcastically adds, “will it include a pledge to also do ‘whatever it takes’ to get to the Eurozone to net-zero carbon emissions?“
