Stocks slide on Thursday as markets once again contended with hawkish commentary out of Fed officials who suggested the market is under-appreciating the likelihood of further tightening from the Federal Reserve this year.
First, the scoreboard:
- Dow: 17,435, -91, (-0.5%)
- S&P 500: 2,040, -7, (-0.3%)
- Nasdaq: 4,715, -24, (-0.5%)
- WTI crude oil: $48.10, -0.06%
- 10-year Treasury: 1.85%
Expect a lot more of this, too.
On Thursday we heard from Richmond Fed president Jeffrey Lacker and New York Fed president Bill Dudley, both of whom suggested markets are under-appreciating the likelihood that the Federal Reserve moves more aggressively on raising interest rates this year.
In an interview on Bloomberg Radio Thursday morning, Lacker said he supported an interest rate hike at the Fed’s April meeting and thinks the case for raising interest rates in June would be “very strong.” Lacker is not a voter on the Federal Open Market Committee (FOMC), the committee that votes and determines actual policy decisions.
Lacker added that he thinks markets took “the wrong signal from us pausing in March and April” as a sign additional rate hikes in 2016 were off the table. He added that he’s “comfortable” with four rate hikes this year.
Markets are expecting one.
Dudley also emphasised that June is a “live meeting,” something Fed chair Janet Yellen has stressed in recent communications though markets by and large discount this idea. Dudley added that if the economy follows his forecast then an additional rate hike in June or July — the Fed meets in both months — “is a reasonable expectation.”
Dudley is an FOMC voter.
And while I think some in markets are quick to dismiss jawboning from Fed officials as merely that, the recent ramp-up in hawkish communication from the Fed is clearly in reaction to a market that had, in the Fed’s mind, become too complacent with respect to the Fed’s stated intentions.
The most recent “dot plot,” which is a rough guide to what the Fed sees as the likely path of interest rate increases, suggests three rate hikes are likely this year. Currently markets are pricing in one rate hike; just last week the market’s baseline expectation was for no moves until 2017.
The sort of counter-narrative to the Fed’s recent commentary has emerged from this chart out of Bank of America Merrill Lynch, which was circulated by Brean Capital’s Peter Tchir on Wednesday (yes, research gets shared a lot!).
The doom loop outlined here puts us right in the top right: Fed threatening a rate hike, markets tanking.
Stocks sold off following hawkish Fed commentary on Tuesday, they were whipsawed around on Wednesday after similar indications from the latest Fed minutes, and stocks were lower on Thursday, too.
Treasury yields have also spiked in recent days — bond prices fall when yields rise — as another sign of pressure Fedspeak is putting on markets. So then the market would say the next thing that happens is the Fed passes in June after markets fall further, then we rally, then the rhetoric is ramped up again and so on.
Alternatively, this is the next “Fed meme” to die.
Via Deutsche Bank chief international economist Torsten Sløk (emphasis his):
I hosted a big macro client lunch here in Manhattan, and one topic we debated intensively was why market sentiment is so bearish.
Some equity investors would argue that the bearishness is temporary as earnings over the past year have taken a big hit because of oil and the dollar. But now the trends in dollar and oil have reversed and as a result, earnings will rebound over the coming quarters.
Most fixed income investors, on the other hand, are permanent bears. They would argue that, yes, the macro data so far is OK, but we have a long list of unquantifiable risks that continue to cloud the macro outlook such as China, elections, high debt levels around the world, and the path of the dollar and oil if the Fed raises rates later this year. According to this view, we have a permanent secular stagnation-type scenario with plenty of downside risks, including a hard landing in China. […]
My baseline scenario is that the market over the coming months will move up toward the Fed’s view of the outlook, and while there may be some bumps on the road, this is likely to be a smooth process. But the longer the market ignores the Fed, including the fact that the economy is soon at full employment and therefore closer to a broad-based uptrend in wages and inflation, the higher is the risk that we could see a move in bond markets similar to what we saw in 1994.
That is why I continue to believe that the biggest macro risk for investors is inflation because the market doesn’t expect it and it is the main reason why the Fed has started raising rates.
I love this stuff: “Most fixed income investors, on the other hand, are permanent bears.”
But I think the two scenarios Sløk outlines for bonds completely explains this phenomenon!
On the one hand we have bond investors making money as growth continues to disappoint and yields fall — again, meaning prices rise — rendering a generally bearish view of economic growth profitable.
On the other hand we have a better-than-expected economy leading to losses for bond investors, rendering their bearish view of the world (and perhaps their portfolio) warranted as they will lose money being long bonds as yields rise.
Credit investing is about capital recovery while equity investing is about capital growth. If you own the debt of a company the best you can do is get the coupon they agreed to pay twice a year and then your principle back when the bond matures. (I mean, a lot of other things can happen but this is a very simple outline.)
Stock investors, meanwhile, want things to get better forever so that earnings increase, dividend payouts increase, and stock prices rise. (Stocks, by the way, usually go up.)
And this is why people on either side of this divide like to say mean things about each other.
Via Bob Bryan:
Golfer Phil Mickelson was named in an insider-trading case by the Securities and Exchange Commission Thursday morning, according to a filing.
The case alleges that Mickelson received insider tips from sports bettor Billy Walters, one of the co-lead defendants in the case, regarding Dean Foods.
Walters was receiving the information from Dean Foods chairman Thomas Davis, the other co-lead defendant.
According to the filing, Walters called Mickelson in July 2012 telling him to purchase Dean Foods stock based on information received from Davis that the company was about to spin off its WhiteWave division. The week after the phone call Dean Foods stock rose 40%, making Mickelson almost $1 million.
In the case Mickelson is a relief defendant, meaning that he was unaware of the scheme between Walters and Davis; he is not accused of insider trading, just unwittingly profiting from it.
Mickelson is paying the money back, too.
The most obviously entertaining thing about this saga for Mickelson is that he got caught up in trading inside information without really knowing about it.
Mickelson is a pro golfer not a pro investor. He owed Walters money. Walters called him and said he had a hot stock tip. The stock tip worked out. Mickelson cashed out (and presumably paid back Walters). This is not allowed.
But so it seems the SEC deemed Mickelson’s trading on this information part of his getting caught up in something that was, basically, bigger than him. And in a way we sort of backdoor into getting a clearer view of what is and what is not insider trading.
You need to know you are trading on inside information, not merely trade on information that was obtained by inside means, then act, then profit, then get in trouble.
Mickelson, again, said he was sorry, paid back the money he owed with interest, and will move on. His sponsors will also stand behind him, according to ESPN.
Brookings published a fun map of similar US metros. Also in maps: Canada.
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