The Federal Reserve ("Fed") said yesterday, among other things, that it doesn't expect to raise interest rates again this year. Roughly three months ago, it was expecting to raise interest rates two times in 2019. That is a policy pivot to be sure, yet the initial response in the stock market to the latest pivot has been less than enthusiastic.
Some will say it is a sell-the-news response. After all, the fed funds futures market had already priced out the likelihood of any further rate hikes in 2019 before yesterday's announcement. Nevertheless, it seemed out of character for a typically prudent Fed to go from two expected rate hikes to no rate hikes in a short period of time.
It's a shift dictated by a belief that the U.S. economy is in good shape and that current data, which shows muted inflation and solid growth, doesn't signal a need to move rates in any direction, according to Fed Chair Powell.
The most notable move after the Fed decision has been in the Treasury market. Yields have collapsed. The 10-yr yield is down to 2.52% (from 2.62% only a few days ago), which is the lowest since January 2018, leaving the spread between the 3-month bill (2.47%) and 10-yr yield at just five basis points.
We call that term spread to readers' attention because researchers at the Federal Reserve Bank of San Francisco have said that term spread is the most reliable predictor of recession among different term spreads.
That's something to keep an eye on, as is the Treasury market's behavior. If the Treasury market thought the Fed was making a policy mistake by inviting a spike in inflation with the persistence of low policy rates, the 10-yr would not be rallying like it is.
The fact that it is rallying is the worrisome point, because it reflects a belief that the Fed is right to hold rates down because growth is going to disappoint (disappointing growth will keep inflation in check and perhaps lead to disinflation). If growth disappoints, earnings growth should, too.
There's the rub for a stock market that has rallied despite a sharp cut to first quarter earnings growth estimates, comfortable with the notion that earnings growth is going to accelerate in the second half of the year.
If nothing else, the behavior of the Treasury market is forcing the stock market to think that it has gotten ahead of itself, which is creating some selling interest in the immediate wake of a Fed decision that was surprising and not surprising at the same time.
There have been some other surprises today, too. President Trump reportedly wants China to double, or triple, its current commitment to purchase U.S. products, which is said to be a tough ask for China, according to CNBC.
Biogen (BIIB), meanwhile, said it is discontinuing its Phase 3 trials of aducanumab for Alzheimer's disease. That has been a major -- and negative -- surprise. Shares of BIIB are down 26% following the news, which is exerting some added weight on the futures market.
Micron (MU) is providing a measure of offsetting support, trading up 3.4%. That moves comes after reporting better than expected fiscal Q2 earnings and issuing disappointing fiscal Q3 results. Micron, however, said it expects NAND growth to resume in fiscal Q4. That view has added to the belief seen in huge price spikes this year that the semiconductor industry is at, or near, a cyclical bottom.
Separately, there were only positive surprises in this morning's economic data.
Initial claims for the week ending March 16 decreased by 9,000 to 221,000 (Briefing.com consensus 223,000) while continuing claims for the week ending March 9 dropped by 27,000 to 1.750 million.
The key takeaway from the report is that it covers the period in which the survey for the March employment situation report was conducted, so with the low level of initial claims, expectations will pick up that March nonfarm payrolls will be up by a solid amount.
The Philadelphia Fed Index jumped to 13.7 in March (Briefing.com consensus 6.0) from -4.1 in February. The key takeaway from the report is that it was accented by a pickup in new orders and a moderation in price pressures, which is the type of combination that has convinced the Fed to be patient before making any policy rate changes.
These positive economic surprises notwithstanding, expectations for a lower open for the stock market persist.
The S&P futures are down nine points and are trading 0.4% below fair value. The Nasdaq 100 futures are down 29 points and the Dow Jones Industrial Average futures are down 89 points, leaving them 0.4% and 0.5% below fair value, respectively.
(Editors' note: the original comment mistakenly indicated Micron reported disappointing fiscal Q3 results. That has been corrected to indicate the company reported better than expected fiscal Q2 results and issued disappointing Q3 guidance)