The Federal Reserve’s latest monetary policy announcement was a non-event. In response, markets didn’t do much on Wednesday with stocks closing mixed, the dollar falling slightly, and bonds rallying.
First, the scoreboard:
- Dow: 18,050.9, +60.6, (+0.3%)
- S&P 500: 2,096, +4.3, (+0.2%)
- Nasdaq: 4,862, -26, (-0.5%)
- WTI crude oil: $45.30, +2.9%
The Fed’s announcement on Wednesday “was a monumental nothing-burger,” according to Neil Dutta at Renaissance Macro.
The Federal Reserve kept its benchmark interest rate pegged at 0.25%-0.50% on Wednesday in a hold that was all but assumed by Wall Street.
The Fed’s statement was little-changed, but did leave the door open — if only slightly — for a potential interest rate increase at its June meeting. Depending, of course, on the data.
“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will continue to strengthen,” the Fed said Wednesday.
“Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 per cent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.”
Wednesday’s statement, while still making reference to the Fed’s close-watching of international developments, left out language suggesting that these developments pose a downside risk to its forecast, a clear indication that the Fed agrees with markets, generally speaking, on risks posed by the rest of the world.
“Overall, the shifts in the language suggest the Fed wants to keep its options open, and to make sure markets know it,” said Ian Shepherdson at Pantheon Macro following the statement. “June is therefore in play, but we still think the Brexit referendum just eight days after the meeting is a serious barrier to action.”
Elsewhere in the US economy on Wednesday, the latest report on pending home sales beat expectations, with pending sales rising 1.4% over the prior month.
This is, after all, a daily markets wrap, but the biggest news over the last 24 hours has been the latest updates from the US presidential election which will now almost certainly pit Donald Trump against Hillary Clinton in the general election. (Ted Cruz, however, looks set to name a running mate despite not being, well, the nominee.)
Fortunately, we’ve got markets and finance related folks talking about it. This is our in!
Speaking on Bloomberg TV on Wednesday, BlackRock CEO Larry Fink said that candidates’ talking down of the US economy is a negative for growth. “We have an election here in this country where I think there is more fear-mongering than talking about hope and a renewed future — so I think consumers will hold back,” he said in an interview with Erik Schatzker.
This seems reasonable.
Of course, as those in the media business will attest, bad news sells better than good news and so if you’re trying to get elected president, which is about 50-50 raw popularity against actual political ambitions, you’re going to find ways to get noticed. I guess talking down the good but not great US economy is one way of doing that.
Elsewhere, Daniel Clifton and the team at Strategas Research Partners find that among the investor class they’re in touch with, interest in the election is waning big time.
“I have spent just about every day in April on the road meeting with institutional investors,” Clifton wrote in a note on Wednesday.
Adding (emphasis mine):
“The biggest takeaway from my travels this month is how investor excitement about the election has really started to wane from the start to the end of the month. There was an insatiable appetite to discuss the election at the beginning of the month, but over the past two weeks the meetings are more about policy-related issues or what a Hillary Clinton Administration will look like. We get the sense from our conversations that as the odds that Kasich would be the nominee or possibly that a contested convention declined, enthusiasm fell off. We often hear ‘Is this the best we can do?'”
Larry Fink also talked about China, where he sees a “20% chance” its debt bubble bursts.
On the one hand, it’s only a 20% chance. On the other hand, if this bubble does burst, conventional wisdom says it would be bad and so, well, I guess hopefully the 80% scenario plays out? This one, as with all future hypotheticals, is in my view basically a 50-50 because it either will or won’t.
In related China bubble talk, Jim Chanos has an amazing story of when he realised the whole thing was a nightmare. As he told the FT’s Matt Klein, one of Chanos’ real estate analysts presented to his firm’s partners that the country was building about 30 billion square feet of office space, or enough for every Chinese man, woman, and child to have a five-by-five cubicle.
This seemed like too much.
Elsewhere in China, the latest China Beige Book survey — an on-the-ground view of the economy based on anecdotes gathered from business contacts — indicated that something might be wrong in the labour market. “The principal reason China has been able to defy market expectations for more aggressive stimulus was stability in the labour market, despite overall economic deceleration,” the report said.
“Time may have run out. Led by rising layoffs at private firms, Q1 job growth took a notable hit, sliding to a new four-year low. Expectations of future hiring also dove.”
And to tie the whole election and China sections together, the world is becoming decreasingly globalized, something Joe Quinlan at Bank of America Merrill Lynch told Bob Bryan keeps him up at night.
Keep your friends close but your enemies closer, or so the cliche goes.
And on Wednesday, Yahoo did the business version of this, adding activist investor Jeff Smith as well as four independent directors proposed by Smith’s firm Starboard to the company’s board of directors in an effort to placate its increasingly vocal investor base.
Smith will also join the board’s strategic review committee.
What this means for Yahoo, really, is that a sale of its core business could happen sooner rather than later, Starboard is clearly in control over there, and Marissa Mayer’s days are likely numbered.
Also in tech, Apple shares were hammered on Wednesday, falling more than 6% after the company reported its first quarterly revenue decline in 51 quarters — or since 2003 — but, as BI UK’s Jim Edwards reported, Wall Street still loved it.
The real problem for Apple, however, is in China, where revenue fell 26%. On its earnings call, Apple CFO Luca Maestri said of this decline, “Keep in mind that we were up against an extremely difficult year-ago compare when our Mainland China revenue grew 81%. We remain very optimistic about the China market over the long term, and we are committed to investing there for the long run.”
Ben Thompson at Stratechery, however, wasn’t totally convinced this isn’t a major issue, writing Wednesday that it seems likely — and, for Apple, concerning — that the company saturated China’s high-end smartphone market in one shot and now is what it is… in the market that was supposed to be its next big growth driver.