Summary
- The Fed is turning more dovish.
- The BOE maintained rates at 0.75%.
- The markets continue to celebrate the Fed's dovish turn.
The Fed is turning more dovish, based on yesterday's policy announcement (emphasis added):
The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
This shouldn't come as a surprise. Slowing global growth has forced other central banks to either lower rates (Russia and India) or put forth more dovish commentary (ECB). Although U.S. data is mostly positive, the opening paragraph of the latest Beige Book contained a number of qualifying statements regarding the economic activity. That, combined with weaker international manufacturing PMI data, declining U.S. government bond yields, and the latest employment report was probably enough for the Fed to shift its position.
The White House continues to seek ways to replace Fed Chair Powell. From Bloomberg:
President Donald Trump has told confidants as recently as Wednesday that he believes he has the authority to replace Jerome Powell as chairman of the Federal Reserve Board, according to people familiar with the matter.
In Trump’s line of thinking, he could demote Powell to be a board governor, but isn’t planning to do so right now, the people added.
While bulls would welcome the obviously more dovish ramifications such a move would imply, bears would be just as concerned by the political overtones. Count me in the latter category.
The Bank of England maintained rates at 0.75%. Here is how they characterized the risks to the UK economy:
Since the Committee’s previous meeting, the near-term data have been broadly in line with the May Report, but downside risks to growth have increased. Globally, trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further. Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate.
The BOE is making many of the same arguments as other central banks, especially about trade.
Let's turn to today's performance tables:
Another decent day in the market. The dollar was down, but that's to be expected when the Fed is telegraphing rate cuts. As has been the case during the Spring rally, the large-cap indexes led the market higher; the smaller the size of the company comprising the index, the less the gain it had. The Treasury market also rose, although the gains were smaller than the equity indexes.
All sectors rose today as well. Energy was the top performer thanks to rising Middle East tensions. Industrials and technology filled out the top three performers. Defensive sectors occupied the 5th, 7th, 8th, and 10th positions on the charts.
The good news for the bulls is that small-caps are making headway.
Mid-caps are moving higher. They have advanced through the 200-day EMA, the shorter EMAs are above the longer EMAs, and the MACD is rising. Today's close is a few points below the high hit in April.
The IWM has moved through the 200-day EMA and is also in a solid move higher. The shorter EMAs are still below the 200-day EMA, but that should start to change over the next few days. Prices are still below all-time highs, however.
Although the IWC is below the 200-day, it's still in an upward trend with rising momentum.
Here's the problem:
The Treasury market continues to rally.
It's important to remember the fundamental backdrop propelling the market higher: the Fed is expected to cut rates because the economy is softer. Global data, while still positive, is trending lower. There is a rising concern that declining trade will continue. Add the inversion in segments of the yield curve, and there is ample reason to argue that the economy is closer to a recession than most would like to admit. That doesn't mean it will happen; the ingredients are there, however.
That's why the Treasury market rally is so important. It's also why I remain suspicious.