The Narrative Flips… The Fed Reports You Should Be Watching

Last week, leaders from the U.S. and China effectively kicked the tariff tantrum down the road. With that uncertainly moderated as we wait for the next chapter in that long-running story, a presidential tweet yesterday morning confirmed this posture (highlighting is mine):

 

And with that, an old market narrative becomes the driving force for the short run.

We’ve seen that in the short-term market pullback to start this week. That was because of… (wait for it…) a really good employment report last Friday, where an increase in jobs of 224k was reported vs. 160k expected. Monday and Tuesday were full of angst that this good news could trigger the Fed to forego an interest rate decrease, and hence good economic news became bad news for the market.

And that “good economic news is bad for the markets” theme is a very obvious tell of a period when the dominant market narrative is the whether the Fed monetary policy will accommodate or tighten.

Fed Chair Powell’s prepared statement was released this morning that had the statement that the economic “outlook continues to dim”. Can you tell on this chart when said statement was released?

 

From a market narrative perspective, we can deduce that direct signaling of accommodative policy by the Fed is a good thing…

Many people have claimed that a 0.25% rate cut is already priced into the market. So why the big pop in the market if Powell’s statement was just confirming what is already assumed? The answer lies here:

 

Yep – after the Powell statement was released, traders using futures contracts to hedge their exposure to future Fed rate changes bid up the chace of a 0.5% cut from 3.3% to 21.4%!

Under this narrative, we are firmly in a “next number” market. Traders and investors will be applying their “good numbers are bad” and “bad numbers are good” filter to every significant economic number between now and the July 30-31 Fed meeting. So it might be instructive to see what important economic reports will hit between now and then. Here’s a fairly useful list:

  • Wednesday 7/10/19 at 2 p.m. – Fed Minutes from the June meeting. Even after Powell’s testimony for the congressional subcommittee this morning, the release of the minutes this afternoon will be parsed for any hints about future actions.
  • Thursday 7/11/19 at 8:30 a.m. – The Consumer Price Index (CPI) will come out. Estimates are for a 2% inflation rate with the core rate that excludes food and energy coming in two-tenths lower. These numbers are so close to where the Fed would like them to be that it would take a big upward surprise (which the market would hate) or downward surprise (opposite reaction) to move the market.
  • Tuesday 7/16/19 8:30 a.m. – Retail Sales report. With expectations low in this beleaguered sector, an upside surprise could happen. Contiuned weakness in this consumer spending indicator would make the market jump for joy since that spending makes up 2/3 of GDP, and thus has the Fed’s attention.
  • Friday 7/26/19 at 8:30 – Preliminary GDP estimate. Most analysts expect a quiet report in the 2.75% to 3.25% range (bracketing the expected 3.0% number), but with weakness to come in the second half of the year. Again, it would take a surprise outside of the range to move markets.
  • Tuesday 7/30/19 at 8:30 – The Personal Consumption Expenditure (PCE) inflation reading is usually lower than the CPI measure mentioned above, and the PCE is a favorite of the Fed. It’s expected to come in at 1.5% below the Fed’s target of 2.0%. So even an “expected” would be good news for the market.
  • Wednesday July 31 at 2 p.m. – Fed Rate Decision. All the previous bits and pieces lead up to this one.

I’ve found that predicting the Fed’s decisions is a zero-sum game, so I concentrate on reacting to what happens. But leading up to the announcement, there will be more market volatility than usual, and I expect it to be slanted toward to positive side for stock market movements.

I’ll be keeping a close eye on each of these reports, and I will most likely have a few trade recommendations ready for Stealth Profits Trader subscribers on how best to play the reactions and overreactions that they’ll cause. Make sure you don’t miss out on the potentially huge profits. Check out the limited-time deal my publisher is offering for you to become a member of Stealth Profits Trader.

Bottom line: With the S&P 500 holding firmly above June 21, 2019 all-time highs, pullbacks are to be bought. The strongest sectors over the past five weeks since the June 3 market bottom should continue to dominate. The three strongest are Technology (XLK), Communication Services (XLC) and Consumer Discretionary (XLY). One could do worse than expending your energy there…

Great trading and God bless you,

 

D.R. Barton, Jr.

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