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Daily Market Commentary

Commentary prepared by Balance Sheet Solutions, LLC, a wholly owned CUSO of Alloya Corporate Federal Credit Union. Balance Sheet Solutions is a leading broker/dealer, investment advisor and ALM risk management consultant to credit unions.

Wednesday, March 20, 2019 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Balance Sheet Solutions

Market Indications

Graph1 031819

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread-0.04-0.01
2s/10s Tsy Spread0.14-0.01
2s/30s Tsy Spread 0.56-0.02
DJIA-30 25887.38-26.72
NASDAQ 7723.95+9.47
S&P-500 2832.57-0.37
Dollar Idx 96.41+0.03
CRB Idx 184.32-0.91

Today's Market Commentary

Recap – We now are in an environment where the Dow can manage to surge as much as 200 points, as we saw yesterday, and then close down 27 points, on absolutely nothing fundamental at all. In other words, the stock market is being manipulated by rumors, innuendo and news flow. Maybe a tweet containing the word “progress” will turn things around regarding trade talks today. And all Fed Chair Jerome Powell has to do is use the word “patience” once or twice in the press statement later today. It’s both amazing and amusing to see the trading junkies continue to respond to the same piece of news, day in and day out. Reminds me of Bill Murray in Groundhog Day.

Anyway, concerns about the progress of U.S.-China trade talks took the shine off the second half of the U.S. session as the S&P did fall -0.7% from the peaks to close just about flat (-0.01%). Meanwhile, the NASDAQ gained +0.12% to reach a fresh high since October 9. Interest rates were mostly higher, as Treasury yields rose one whopping basis point. At the same time, the Volatility Index touched its lowest intraday level since last October. The MOVE Index is hovering around the year-to-date (and close to all-time) lows. So, all seems fine in the world… for now.

Will the calm continue going into and out of the Fed meeting tonight? If Fed chairs kept score, the S&P 500 has fallen on average -0.25% on Federal Open Market Committee (FOMC) meeting days under Powell’s leadership. The averages for former Fed Chairs Janet Yellen (+0.17%), Ben Bernanke (+0.55%) and Alan Greenspan (+0.18%) all make for happier reading. As discussed yesterday, expect few surprises in the statement or Powell’s rhetoric. Most likely the median rate expectation for 2019 will fall to one hike.

As for the data yesterday, despite being broadly softer, it didn’t move the dial particularly. Factory orders for January printed at +0.1% month-over-month (vs. +0.3% expected) while there were downward revisions for durable goods orders (+0.3% month-over-month vs. +0.4% flash; and excluding transport -0.2% month-over-month from -0.1% flash). However, core capex orders were left unchanged at +0.8% month-over-month.

Bloomberg reported that U.S. trade officials are becoming concerned over the apparent strong degree of pushback from China on issues related to intellectual property. According to the reports, Chinese officials believe they have already made concessions by opening up some industries and moderating their joint venture requirements, and they want reciprocal commitments from the U.S. in the form of eliminated tariffs. Other sources subsequently downplayed the stories, including President Trump who said, “talks with China are going very well.”

Moving on. A Bloomberg story later suggested that the European Union (EU) is likely to tell U.K. Prime Minister Theresa May that she must decide by mid-April whether to extend Brexit until 2020 or risk leaving in three months without a deal. It’s been 1,000 days since the U.K. voted to leave the EU and the biggest question remains: when will the country actually exit the Union? May’s office said there will not be a “long” extension to the current March 29 deadline at the summit of leaders tomorrow, with European Commission President Jean-Claude Juncker already suggesting there might be need for another meeting next week if an agreement cannot be reached in the coming days on the length of the Brexit delay. EU officials are playing hardball, saying that if the U.K. doesn’t take part in European elections, it will be ejected in July.

Finally, to the day ahead, all eyes turn to the aforementioned Fed meeting this afternoon. The FOMC publishes its latest monetary policy declaration at 2:00 pm ET, along with updated economic forecasts that are expected to show only one rate hike this year. Investors will be intensely focused on the Fed’s perspective on its inflation-targeting goal and the balance-sheet runoff, with Chair Jerome Powell holding a press conference 30 minutes after the decision.

Overnight, the MSCI Asia Pacific Index slipped 0.1% while Japan’s Topix Index closed 0.3% higher ahead of the Fed decision. In Europe, there is a bigger slump, where the Brexit chaos returned after May said she would not seek a long delay from the EU while a sharp drop in Bayer and BMW shares dragged Germany’s DAX 1% lower. S&P 500 futures pointed to a relatively flat start to the session.

Bond markets continue to call “bull” on the equity market as they retain a small bid here and the yield on the 10-year Treasury note is trading south of 2.6%. The vast majority of economists don’t see any risk of recession, of course, even as the yield on the two-year Treasury note (2.46%) drifts further below the top end of the band for the fed funds rate. It is interesting to note that the front ends of the yield curves in the U.S., Canada and Australia trading through their overnight rates. Meanwhile, the New York Fed recession probability model pegs the odds of a downturn at the highest in 11 years.

The typical economist (who, I might add, missed both the 2001 and 2008 recessions), strategist and analyst are instead taking their cues from the algo- and momentum-driven stock market. As long as rates remain low, there is nothing to worry about. But they never question why they are so low to begin with. The answer? Read up on Japan.

Finally, it may be lost on these “forecasters” that the most cyclical company of them all, otherwise known as FedEx, could not have been more explicit on what it is seeing unfold, as it missed on profits and sales, and trimmed its second quarter guidance. This is an entity that touches every aspect of the economy and, even amidst all the euphoria, the stock price is off more than 30% from the peak. The company cited “slowing international macroeconomic conditions and weaker global trade growth” for its sluggish numbers – not once indicating that this rough patch is temporary (the widespread consensus view).

Economic Calendar

March 18 - 22, 2019: The Week Ahead

Graph2 031819

Future Fed Expectations

Graph3 031819

Graph4 031819


Select Probabilities based on the Futures 
Probability of Fed Funds rate CUT on March 20, 20192%
Probability of Fed Funds rate CUT on May 1, 20194%

**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.

The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.