(Thursday Market Open) Now that this week’s Fed meeting is out of the way and there’s not too much on the corporate earnings front, investors will likely be looking for international catalysts for stock market direction, such as news on the U.S.-China trade front or Britain’s exit from the European Union.
With just a little over a week before Britain is scheduled to leave the bloc, the Bank of England voted to leave a key interest rate unchanged. The decision comes after the bank sharply downgraded its 2019 forecast for economic growth and as Britain’s prime minister has asked the EU for an extension to the Brexit deadline.
It was a similar situation on this side of the pond yesterday as the Fed held its key interest rate steady and downgraded its estimate for 2019 gross domestic product, providing an initial jolt to the market that ended up fading away, with the subdued sentiment continuing this morning.
The downbeat tune comes after comments by President Trump earlier in the week that he’s prepared to leave tariffs in place on Chinese goods for a “substantial amount of time” continue to weigh on the market.
Seesawing Sentiment
Although sectors like Communication Services and Energy did pretty well Wednesday, Financials dropped more than 2%, helping bring the whole S&P 500 (SPX) down a touch. Despite an initial bounce after the Fed announcement, the broad market benchmark couldn’t hold on to gains.
On the one hand, investors appeared to be broadly pleased with the Fed’s more accommodative stance, which has helped the market rally this year after tumbling late last year in part on worries that the central bank would be too hawkish.
In reinforcing its dovish view Wednesday—with rates staying unchanged, a new dot plot signaling the unlikelihood of a rate increase this year, and the Fed saying it would end its balance-sheet reduction program in September after a slowdown—the central bank gave the market more to cheer about.
But like doves that quickly fly away after being released at a wedding, the celebratory mood dispersed as the afternoon went on.
The central bank’s dovishness comes with a sobering assessment of U.S. economic growth, as the Fed cut its GDP estimate for 2019 to 2.1% from 2.3%.
Worries about slowing growth at home also dovetail with concerns about the global economy if the U.S.-China trade war can’t be resolved soon, as well as a faltering European economy facing sluggish manufacturing and a big political unknown in the form of Brexit.
In fact, before the Fed decision Wednesday, U.S. stock indices were in the red because of concerns about the U.S.-China tariff situation.
According to media reports, Trump said Wednesday that the U.S. could leave tariffs on Chinese goods for “a substantial period of time because we have to make sure that if we do the deal with China that China lives by the deal.” Before then, there was hope that a deal might soon mean an end to or at least a cut in U.S. and Chinese tariffs on each others’ goods.
Results from FedEx (NYSE:FDX), which reported weaker-than-expected earnings and sales and reduced guidance as it cited a weak international trade situation, underscored the trade tensions, as did pressure on China-sensitive stocks like Caterpillar (NYSE:CAT), Deere (NYSE:DE) and semiconductor companies after Trump’s comments.
Financials Falter
But it wasn’t just trade issues that weighed on the market. Bank shares tumbled at the prospect of no more rate hikes this year and as the Fed also indicated that rates could be 50 basis points lower by the end of 2020 than it had forecast just three months ago.
Treasury yields dropped sharply after the announcement, with the 10-year yield falling to its lowest point in more than a year. And the yield curve between the 10-year Treasury and the 3-month Treasury flattened.
Lower interest rate environments can make it harder for banks to earn money on loans. And a flattening yield curve can make for a shrinking profit margin between what banks earn on their longer term loans compared with what they pay in shorter term rates on deposits.
Energy Shines
Energy was a bright spot for bulls on Wednesday. Energy shares rose nearly 0.9% as crude oil prices rallied after government data showed U.S. oil stockpiles plunged by 9.6 million barrels in the week through Friday. A Reuters survey of analysts had been expecting a build, CNBC reported. U.S. crude oil inventories are about 2% below the five year average for this time of year, the government said, and gasoline inventories also fell pretty dramatically.
The U.S. inventory decline comes amid production cuts by OPEC and U.S. sanctions against Iran and Venezuela. A weakening in the U.S. dollar also seems to be helping oil prices. Since oil is priced in dollars, a weakening greenback can help boost demand by making crude cheaper in terms of foreign currencies.
Dollar Down: The buck pulled back sharply against a basket of other currencies on Wednesday as the Fed doubled down on its dovish monetary policy stance and sounded pessimistic on U.S. economic growth. Data Source: ICE (NYSE:ICE). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The Dollar and the Fed: As the Fed solidified its dovish stance on Wednesday, one ripple in the global economy was a weakening U.S. dollar. The buck sank sharply against a basket of other currencies on Wednesday after the Fed announcement. (See chart above.) Why might that be given that we’re in a relatively low inflation environment that wouldn’t seem to be a threat to the value of the buck? Well, for one, the Fed talked about slowing growth in the U.S. economy, which would pressure the dollar by lessening demand for goods and services in the world’s largest economy. Also, stagnant-to-lower interest rates can mean that foreign investors turn elsewhere for yield. It’s possible that some dollar investors and traders had been holding back from selling to wait and see just how dovish the Fed might be. And with the central bank underscoring its commitment to easier policy, perhaps they decided now was a good time to unload some of their dollar holdings.
Digging Into Factory Orders: Although the headline figure for factory orders was slightly disappointing Tuesday, there were still some bright spots in the underlying data that point to decent economic activity. Overall, January factory orders rose 0.1%, slightly below the Briefing.com consensus expectation of a 0.2% gain. But new orders for nondefense capital goods excluding aircraft rose 0.8%, which according to Briefing.com is evidence that business investment picked up. Shipments of those same type of goods also increased by 0.8%, a boon for Q1 gross domestic product forecasts, Briefing.com said.
Mortgages on Main Street: Even with all of Wall Street’s focus on the global economy, it can be hard for the average Joe and Jill on Main Street to understand how all of that affects them here at home. One of the places where international high finance and hometown issues come to a crossroads is when it comes to borrowing money for a home. As Joel Kan, associate vice president of economic and industry forecasting with the Mortgage Bankers Association, put it in the group’s press release accompanying its weekly mortgage application survey yesterday: “Mortgage rates declined once again, as concerns about the slowing global economy and status of Brexit continued to drive investors’ demand for U.S. Treasuries, ultimately pushing yields lower.”
Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.