Monthly Archives: January 2020

Markets are putting pressure on the Federal Reserve for at least one rate cut

Traders work on the floor at the New York Stock Exchange, January 14, 2020.

Brendan McDermid | Reuters

Federal Reserve officials this week affirmed their commitment to staying put on interest rates for the time being, but markets have other ideas.

The fed funds futures market, where traders go to bet on the central bank’s policy direction, is pricing in about a 58% chance of a rate cut by June, according to the CME’s FedWatch tool. Traders are even making room for two cuts, assigning a nearly 60% chance of another move lower in December.

Expectations for an easing have accelerated as the coronavirus has begun to spread globally and threatens to dent China’s already decelerating growth. Stocks have surrendered their January gains and bonds are again flashing a recession signal through an inverted yield curve.

Markets, then, might be bracing against the chance of a contagion both medically and economically.

“The Fed won’t divorce itself from the human aspect of this. But it will be about growth and whether or not this affects growth,” said Quincy Krosby, chief market strategist at Prudential Financial. “China is the second-largest economy in the world. If demand in China slows, it’s going to affect some of the larger trading partners. It won’t just be the U.S. That could stymie attempts of monetary and fiscal stimulus to bolster global growth.”

‘Wait and see’

Central bankers tend to look through events like natural disasters and the spread of infectious disease as one-off events unlikely to figure into the longer-term picture and thus move interest rates.

But Fed Chairman Jerome Powell did acknowledge the coronoavirus this week, and it’s like to come up once officials resume making position speeches now that the January meeting is past.

“The situation is really in its early stages and it’s very uncertain about how far it will spread and what the macroeconomic effects will be in China and its immediate trading partners and neighbors and around the world,” Powell said at his post-meeting news conference Wednesday. “So in light of that uncertainty, I’m not going to speculate about it at this point. I would just tell you that, of course, we are very carefully monitoring the situation.”

He added that future policy decisions are dependent on “the potential ramifications for the U.S. economy and for the achievement of our dual mandate” of full employment and price stability.

The Fed already is in an accommodative posture coming off a 2019 where it cuts its benchmark borrowing rate three times by a total of 75 basis points. A statement the policymakers released upped the central bank’s commitment to boosting the inflation rate to 2%, which it considers healthy for a growing economy.

However, some officials have expressed unease with having rates so close to zero and the limited room that would provide in an economic downturn.

So a cut from here likely wouldn’t come unless the coronavirus presented a longer-term threat to global and U.S. growth.

“If you’re sitting at the Fed, you’re obviously worried about these global risks. But you kind of just sit and wait,” said Jospeh LaVorgana, chief Americas economist at Natixis. “I’d be more comfortable with them keeping the accommodation going through the balance sheet” expansion rather than rate cuts.

Markets, though, are clearly nervous.

Major averages Friday suffered through their worst day since October as the Dow Jones Industrial Average had shed more than 500 points heading into the last hour of trading. The Fed doesn’t directly respond to market tumult, but is no doubt watching what happens.

“What this coronavirus has done now is allow the market to be that much more worried about an inflection in the economy,” LaVorgna said. “The smart move is the Fed should continue to expand the balance sheet and continue to talk dovish, and then take a wait and see attitude.”

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Friday’s massive sell-off ruins ‘January barometer’ market signal

Traders work on the floor of the New York Stock Exchange (NYSE) on January 10, 2020 in New York City.

Kena Betancur | Getty Images

The stock sell-off deepened on the last day of January on concerns that the deadly coronavirus will disrupt the global economy and in the process, ruining an old market indicator that was signaling a positive year.

As goes January, so goes the year — this Wall Street saying from the widely-watched “January barometer” suggests a correlation between January’s performance and full-year returns.

Going back to 1950, when the S&P 500 was positive in January, 86% of the time the full year turned out to be up with only ten major errors through 2019, according to Stock Trader’s Almanac who identified the seasonal signal.

The track record is even better in presidential election years. Since 1928, when January is up in an election year, the year is up 100% of the time with an average S&P 500 return of 16.6%, according to Bank of America.

Friday’s losses cut the January returns for the S&P 500 to just about flat, while the Dow Jones Industrial Average has turned red on the month, setting up a fuzzy signal for 2020 based on the barometer.

Perhaps the indicator now is signaling what a volatile year we may have ahead.

Investors were caught off guard in the middle of January when the coronavirus spread from China to the U.S., causing a broad sell-off in risk assets. Now, the number of confirmed coronavirus cases have risen to 9,882 in mainland China, bringing the global total to more than 10,000 cases with at least 213 deaths. Major U.S. airlines also .

“Uncertainty is never great for stocks, but when it involves the lives of many, many people, it’s impossible to know just what kind of problems this uncertainty will eventually create,” Matt Maley, chief market strategist at Miller Tabak, said in a note.

History shows the barometer’s predictive power is still reliable even with small gains in the first month of a year. Since 1950, there has been 12 times when the S&P 500 is up less than 2% in January, and the market finished the year in the green 11 times of those years, according to Stock Trader’s Almanac.

To be sure, the barometer is by no means an all-clear signal for investors to add more risk given the mounting pressure the market is already under. It’s a popular indicator traders reference, but not always take seriously. The stock market goes up most years more often than not, so it’s possible the indicator is a coincidence.

Still, the late-month sell-off may portend more trouble ahead for the year. On the politics front, the stock market has started to worry about Bernie Sanders gaining momentum in the presidential pool. “Bond King” Jeffrey Gundlach labeled a Sanders “scare,” warning investors that the biggest risk to the markets in 2020 is the Vermont senator becoming “more believed in as a real force.”

“Elevated policy uncertainty usually leads to lower equity valuations and higher implied volatility in the months ahead of Election Day,” Ben Snider, Goldman Sachs equity strategist, said in a note. “The wide range of the various candidates’ policy views and the narrow range of polling and prediction market data indicate a particularly uncertain environment this year.”

— CNBC’s Nate Rattner contributed to this report.

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Stocks making the biggest moves midday: Amazon, IBM, Delta, Luckin & more

A worker assembles a box for delivery at the Amazon fulfillment center in Baltimore, Maryland, April 30, 2019

Clodagh Kilcoyne | Reuters

Check out the companies making headlines in midday trading.

Amazon — Amazon jumped nearly 9% in midday trading after the e-commerce giant reported fourth-quarter earnings well ahead of Wall Street consensus expectations. The company’s revenues grew 21% to $87.44 billion for the quarter as its investments in quick shipping lead to more orders. Amazon CEO Jeff Bezos said “more people joined Prime this quarter than ever before.”

IBM — Shares of IBM jumped more than 4% after the computer software company announced CEO Ginni Rometty will step down in April. Rometty, who has served at the helm of the company since 2012, will be replaced by Arvind Krishna. Shares of IBM were down about 22% since Rometty became CEO.

Exxon Mobile — Stock of the United States’ largest oil company lost more than 4% after the company’s fourth-quarter earnings results showed weakness in the company’s downstream and chemicals business. For the quarter Exxon said it earned $5.69 billion, boosted by $3.7 billion from its Norway divestment.

Colgate-Palmolive — Shares of the consumer products company rose more than 6% after it issued a strong forecast for 2020 revenue growth. Colgate-Palmolive said it expects revenue will grow between 4% and 6% this year, above the 3.8% pace analysts expected according to FactSet. It reported fourth-quarter earnings in-line with expectations, with revenue slightly above as well.

Chevron — Shares of the oil giant slid more than 2% after the company reported a $6.6 billion loss for the fourth quarter. Chevron said the loss was driven by $10.4 billion in write-offs related to its shale gas production, primarily in Appalachia. The company missed revenue expectations for the quarter, pressured by weakness in upstream operations and low oil and natural gas prices.

Delta Air Lines & American Airlines — Delta’s stock dropped 2% after the company announced on Friday that it’s suspending service to mainland China due to the coronavirus. Delta said it will halt China service starting Feb. 6 and last through April 20. American slipped about 3% after the company announced a similar move, declaring it would pause service to China through March 27 in light of the disease.

Luckin — China-based Luckin Coffee plunged 20% in midday trading after Muddy Waters Research tweeted that it’s betting against the stock in light of what it described as fraud and a “fundamentally broken business.” Noted short seller Carson Block, founder and manager of Muddy Waters, is known for turning profits by leveraging his aptitude for detecting underhanded business practices, especially in China.

— CNBC’s Yun Li, Sunny Kim, Pippa Stevens, Michael Sheetz and Maggie Fitzgerald contributed to this report.

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Fed Chairman Powell thought it was ‘terrific’ that a senator defended him against Trump

Federal Reserve Chairman Jerome Powell holds a news conference following a closed two-day Federal Open Market Committee meeting in Washington, September 18, 2019.

Sarah Silbiger | Reuters

In public, Federal Reserve officials repeatedly have said they don’t pay attention to President Donald Trump’s long-standing criticism of monetary policy.

In private, though, it may be a different story, according to a New York Times report.

Email exchanges among central bankers and their staff show that some of them are watching Trump’s continued hectoring of the Fed to lower rates, and aren’t pleased with what they see. The Times acquired the emails following a Freedom of Information request.

“Ugh Ugh,” Fed Vice Chairman Richard Clarida responded when communications director Michelle Smith sent him a screenshot of an August Trump tweet calling Chairman Jerome Powell an “enemy” comparable to Chinese President Xi Jinping.

Later in the day, Smith sent Powell and Clarida an account in which Sen. Kevin Cramer, a North Dakota Republican, said in a radio interview that the Fed should be free of political pressure and expressed support for the chairman.

“Terrific,” Powell replied.

Powell repeatedly has said the Fed is not influenced by the president’s attacks. Trump variously has called central bank officials “boneheads,” compared Powell to “a golfer who can’t putt” and most recently said the Fed should cut rates to help bring down the $23 trillion national debt.

The Fed declined comment on the Times report.

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