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"The economy is not sending any signals that we [the Fed] need to be in a hurry to lower rates." That was the line from Fed Chair Powell yesterday that caught the market's attention and it can be interpreted as both a blessing and a curse.
The blessing is that the economy is doing well. That is good for employment; that is good for consumer spending; and it is good for corporate profit prospects. The curse is that the stock market, which feeds on the manna of lower interest rates, recognizes an economy doing well means the Fed isn't likely to cut the target range for the fed funds rate as much as previously thought.
The latter connection was an added weight on yesterday's market, which was already sagging on further consolidation activity in the wake of the post-election rally and further angst that sticky inflation will keep the Fed from cutting rates as much as previously thought.
The difference is that the Fed chair paid some lip service to that particular idea in more direct terms than he did at the press conference following last week's FOMC meeting. Hence, the market is taking back some of the rate cut premiums embedded in stock prices.
Currently, the S&P 500 futures are down 35 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 203 points and are trading 0.9% below fair value, and the Dow Jones Industrial Average futures are down 174 points and are trading 0.4% below fair value.
This morning's economic data, which suggests the Fed needn't be in a hurry to lower rates, has been a factor for the weakness in the equity futures market. Another factor has been the softness in the semiconductor stocks following fiscal Q1 guidance from leading chip equipment maker Applied Materials (AMAT) that was only in-line with expectations. Investors were hoping for more. AMAT is down 8.9%.
In terms of the data:
- The New York Fed Empire State Manufacturing Survey for November checked in at 31.2 (Briefing.com consensus 3.3) following a -11.9 reading for October. A number above 0.0 is indicative of expansion. The New Orders Index surged to 28.0 from -10.2.
- The key takeaway from the report is that the November reading is the highest reading in nearly three years; moreover, firms remained optimistic that conditions would continue to improve in the months ahead.
- Total retail sales increased 0.4% month-over-month in October (Briefing.com consensus 0.3%) following an upwardly revised 0.8% increase (from 0.4%) in September. Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus 0.2%) following an upwardly revised 1.0% increase (from 0.5%) in September.
- The key takeaway from the report is that the upward revisions for September make the October results better than they appear since the growth is coming on top of a higher base. With month-over-month increases for nonstore retailers (+0.3%), food services and drinking places (+0.7%), electronics and appliance stores (+2.3%), and building materials and garden equipment and supplies dealers (+0.5%), it is clear that the consumer continues to embrace discretionary spending activity.
- Import prices increased 0.3% month-over-month in October and were up 0.8% year-over-year. Excluding fuel, import prices were up 0.2% month-over-month and up 2.3% year-over-year. Export prices increased 0.8% month-over-month and were down 0.1% year-over-year. Excluding agricultural products, export prices jumped 0.6% month-over-month and were flat year-over-year.
- The key takeaway from the report is that prices picked up on a monthly basis following declines in August and September.
The Treasury market had a textbook reaction to the data showing some otherwise solid economic activity. Prices went down and yields went up. The 2-yr note yield went from 4.29% to 4.35% and now sits at 4.34%. The 10-yr note yield went from 4.42% to 4.46% and now sits at 4.44%.
The 10-yr note yield faces stiff overhead resistance at 4.48% (the November 6 post-election high) with 4.50% in the same category. There has been chatter that long-term rates are rising on account of inflation worries, which some participants felt would be inflamed if the Fed keeps cutting rates at this juncture.
With the signaling from Fed Chair Powell that the Fed doesn't need to be in a hurry to lower rates, he might have surreptitiously quelled some of that inflation angst. If so, the 10-yr note yield would have some room to back away from the 4.50% level, which could end up being a good thing for stocks.
For now, there is still tension on the interest rate line because the economy continues to walk a no landing line.
