Jim’s Notes – FOMC Creates Volatility

Moving the Market – May 1st

The FOMC decision was to leave rates unchanged as many expected, but Powell offered an olive branch by stating he believed further increases in interest rates were unnecessary. Those words rallied stocks for about 45 minutes and then they reversed into the close erasing all the gains. Easy come easy go… now we see how the markets respond in kind on Thursday. Tuesday the markets reacted to ugly economic data… Wednesday the data was equally as bad with the ISM Manufacturing index falling to 49.2 from 50.3 prior and back to a contraction mode for the sector. The jobs data of course was positive as the administration continues to pound the drum on employment keeping the economy going. Even Mr. Powell talked about employment remaining strong and unemployment at a low rate. He also stated that the economic activity continued to expand at a solid pace. Oh, what a tangled web we weave… The key moving forward is to understand the current administration, the Fed, and the Treasury are hell-bent on protecting the system that is and they are willing to twist and turn data to make it look like all is well during an election year. The reality is in the data. It continues to show weakness at each turn. The revisions month after month of top-line reported numbers being lowered the next month to reality. The economic situation is not great and we continue to see it in earnings reports, transportation of goods, consumer data, delinquent loan payments, bankruptcy filings, commercial real estate, etc. The reporting on the financial stations are watered-down Kool-aid of talking heads who either have their heads in the sand or failed to study or understand any economic history. The last key part of the statement that we believe was important was the change to Quantitative Tightening (QT). Beginning in June the pace of decline of its securities holdings would be slowed by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. In other words, loosening or liquidity. This will aide in the pain of higher for longer from the Fed’s perspective. As we move forward the goal is to take what the markets offer despite our beliefs about the economy or valuations, the markets will collectively act on the beliefs of the masses. Thursday will be of interest as to how investors respond with time to review the pontification of lies and whether they believe them or not. I believe short term they do.

The major indexes were mixed on the day as investors saw more negative economic data and a Fed determined to support the current system. The leadership came from utilities and basic materials. Five sectors closed in the green, but the leadership of late closed well in the red. The NASDAQ closed down 0.3%, DIA was up 0.2%, and the SP500 was down 0.3%. The major indexes closed mixed with plenty of intraday volatility. The SOXX was down 3.3%. Small Caps (Russell 2000) were up 0.2%. The ten-year treasury yield was 4.59% down 9 bps for the day. Crude Oil (USO) was down 3.1%. (UGA) was down 3.7%. Natural gas (UNG) was down 2%. The dollar was down 0.1%. We are focused on managing the risk in the current environment and letting it unfold.

Thursday Outlook: Markets were flat into the FOMC meeting then rose 1.7% only to decline 1.8% into the close. The initial reaction was to celebrate Powell’s comments, but the sellers had different thoughts. They used the upside to sell. We will see how the overnight thoughts add up. I am leaning towards some near-term buying from those who are drinking the Kool-aid. Commodities were lower again with crude falling 3% on supply data. Watching how that sector unfolds along with the dollar. The dollar jumped on Tuesday… closed flat on Wednesday… should be rising based on the economic data and outlook from the Fed standing pat on interest rates. Patience is the key.

Chart of Sectors: This chart starts at the previous high for the S&P 500 index on March 28th. Watching the bounce from the April 19th low currently for the leadership as the selling on Tuesday changed the view. Some rotation with energy selling.

Charts to Watch: See Notes on “Reality of the Markets”

Headlines Worthy of Note:

The Federal Reserve’s FOMC statement on May 1, 2024 highlighted several key points compared to the previous meeting:

  1. Economic Activity and Employment:
    • Recent indicators suggested that economic activity continued to expand at a solid pace.
    • Job gains remained strong, and the unemployment rate stayed low.
  2. Inflation:
    • Inflation had eased over the past year but remained elevated.
    • There was a lack of further progress toward the Committee’s 2 percent inflation objective.
  3. Balance of Risks:
    • The Committee judged that the risks to achieving its employment and inflation goals had moved toward better balance over the past year.
    • However, the economic outlook remained uncertain, and the Committee remained highly attentive to inflation risks.
  4. Monetary Policy Decisions:
    • The target range for the federal funds rate was maintained at 5-1/4 to 5-1/2 percent.
    • The Committee would carefully assess incoming data, the evolving outlook, and the balance of risks when considering adjustments to the target range.
    • The Committee did not expect it would be appropriate to reduce the target range until there was greater confidence that inflation was moving sustainably toward 2 percent.
  5. Securities Holdings:
    • The Committee would continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
    • Beginning in June, the pace of decline of its securities holdings would be slowed by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.

President Biden will continue to use TikTok to campaign even after banning it in the US. This was reported by the Financial Times. The law calls for TikTok parent ByteDance to divest itself from the app within the next year. If not, it will be banned in the US… The deadline is January 19th coincidentally the day before the presidential inauguration. Go figure.

Earnings from AMZN and AAPL on deck. AMZN beat estimates on Tuesday after hours.

Quote of the Day: “I am so thankful for the 3-ounce ziplock bag, so that I have somewhere to put my savings.” — Paula Poundstone.

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