Wall Street Settles Into Idea of Trump Presidency
With the inauguration more than two months away, do we now price out those lower interest rates that had been priced in? Also, analysts shocked and awed at defense pick, the PPI, and more.
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The Nasdaq Composite posted its third consecutive red daily candle, while the S&P 500 put up its second losing session in three. The base of consolidation that we, as investors, had been seeking, has clearly arrived. Now, does this development across U.S. financial markets end up looking like the pause that refreshes, or has our marketplace started to price in new worries?
The question is valid. Since the national election in the U.S. handed control of all three branches of the U.S. government over to the Republican party, a market that had already priced in a certain level of economic growth and lower interest rates, went ahead and priced in the likelihood of a coming era of deregulation. Tariffs as inflationary? Are these tariffs more than talking points for negotiations? Probably, at least to a degree. Does this add kindling to the reacceleration of inflation already under way across said economy? While there would certainly be a benefit to the middle class in terms of job creation and wage growth, all classes would feel the inflation.
The question now becomes, with President-Elect Trump's inauguration still more than two months away, do we now have to price out those lower interest rates that had been priced in? This is what hit U.S. equity markets on Thursday. This is what has been hitting U.S. equity index futures markets overnight as foreign equity markets have been well-mixed.
The Fed Chair
Fed Chair Jerome Powell spoke publicly from Dallas on Thursday afternoon. Powell made a speech and then participated in a moderated discussion. He was, in my opinion, quite clear in that he used this appearance to create some optionality for the Federal Open Market Committee in terms of the trajectory for monetary policy over the next few months. To put it more succinctly, Powell is no longer sure that short-term interest rates need to go lower.
Powell stated, "The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully." This statement is in contrast to what the FOMC and its membership has signaled at recent meetings and in public appearances.
On inflation, Powell spoke as if he had not seen the October consumer price and producer price indexes that had heated up from September and had not seen projections for November that imply further acceleration of consumer prices for that month. But as his words dragged on, I think it became obvious that he has. Powell said, "Inflation is running much closer to our 2% longer run goal, but it is not there yet. We are committed to finishing the job. With labor market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2% objective, albeit on a sometimes-bumpy path."
Then came clarification... "In this situation, what it calls for is for us to be careful. The plausible range of neutral levels, it may be the case that we slow the pace of what we're doing just to increase the chances that we get this right."
My Take?
It's simple. Powell, in my opinion, would prefer to not take further action on monetary policy until after the inauguration and perhaps longer than that. How long? That would depend on how the new administration's policies actually unfold once the incoming president's people are installed in key positions.
On Thursday, the yield for the U.S. Two Year Note increased by five basis points to 4.35%, while the yield for the Ten-Year Note stayed right where it was and remains this morning, close to 4.43%. One Year paper was hit fairly hard as well, though T-bills of shorter maturities were largely left alone.
Fed Funds Futures trading in Chicago did reprice expectations for the Dec. 18 FOMC policy decision on Thursday, as the probability for a quarter-point rate cut dropped from more than 70% earlier in the day to roughly 62%. This morning, that likelihood has held at 62% overnight. There is only an 18% likelihood for an additional quarter-point rate cut on Jan. 29, while there is a 27% likelihood currently priced in that the Fed has already made its last rate cut until at least March 19.
Producer Prices
Like consumer prices, producer prices for October heated up a bit from September. Unlike consumer prices, there was a little bit of a surprise in the producer prices. At the headline October PPI was up 0.3% month over month, and up from 0.0% in September. This was expected. On a year-over-year basis, October PPI printed at growth of 2.4%, up from September's 1.8% print and above expectations for growth of 2.3%.
At the core, October PPI printed at month-over-month growth of 0.3%, up from 0.1% in September and above expectations for 0.2%. On a year-over-year basis, core October PPI printed at growth of 3.1%, up from September's 2.8% and above expectations for growth of an even 3.0%. Producer prices do not always lead consumer prices in a direct, and precise way, but in terms of trend, PPI is a leading indicator.
For more fun with macro, Friday morning will bring us October retail sales, October industrial production and the November survey results for the Empire State Manufacturing Index. After all that, we'll hear from New York Fed Pres. John "Lightning Bolt" Williams.
Marketplace
For the regular session on Thursday, the S&P 500 gave up 0.6% as the Nasdaq Composite shed 0.64%. Small caps were slapped around fairly hard, with the Russell 2000 down 1.37% and the S&P 600 down 1.26%. Of all of the major to mid-major equity indexes I follow, none closed out the day in the green. In fact, the only green on my screen last night came from the Volatility Index and the Philadelphia Gold/Silver Index.
Ten of the 11 S&P sector SPDR exchange-traded funds closed out Thursday on the wrong side of "unchanged." Only Energy XLE shaded into the green, gaining just 0.38%. Three of these funds gave up more than 1% for the day, led lower by the Industrials XLI and Health Care XLV.
Breadth was sloppy once again. Losers beat winners by a rough 5 to 3 at the NYSE and by about 13 to 6 at the Nasdaq. Advancing volume took just a 39.4% share of composite NYSE-listed trade, but a surprising 51.3% share of composite Nasdaq-listed activity. On a day over day basis, aggregate trade dropped by a mere 0.8% across NYSE-listed securities, but by 9.8% across names domiciled at the Nasdaq.
Anyone Else Notice ...
The terrible beating suffered by Defense and Aerospace stocks on Thursday? This was worse than the losses sustained by the broader marketplace. It seems that at least analysts covering the large defense contractors have been taken off guard by the announcement that Major Pete Hegseth would be nominated to the post of Secretary of Defense.
Hegseth is seen by the less knowledgeable as a weekend morning anchor at Fox News where his conservative views are no secret. The mere fact is that this is a field grade infantry officer with multiple combat deployments under his belt and has been decorated more than once. I honestly do not understand the market reaction. Hegseth has been critical of woke generals and admirals who have been political career officers. So, what? This is the one job where you want war fighters.
We've had career officers in this post for the most part, over the past decade, usually with sub-par results. I have no idea that a field grade officer with the kind of broad education that Hegseth has, and his more strategic than tactical overview of the military, can be capable. I was just a sergeant, and I had absolutely no doubt at all that I was usually a lot brighter than the battalion and regimental commanders appointed over me.
Did Ashton Carter ever serve? I am fairly sure that Leon Panetta only served for two years. Even Donald Rumsfeld, who might be the most effective SecDef of our times, while serving in the Navy and Navy Reserve for decades, never rose to the rank of rear admiral. My point is that one need not wear stars on their collar to take on a leadership role at this department. There is no doubt that the upper ranks of the military have to be cleared of political career officers.
The fact is that if the U.S. were to engage in a real kinetic conventional war with a near-peer adversary such as China that after all of the munitions we have set to eastern Europe, both the Army and the Marine Corps would likely run out of ammunition within 16 days. We have to replenish our own stocks regardless of who is at the top at Defense. Either that or surrender our place of global influence. I don't see that happening.
Lockheed Martin LMT, Northrop Grumman NOC, RTX RTX, and General Dynamics GD were down 3.3%, 3.8%, 3.9% and a whopping 6.8% respectively. I am long all of these names, though I have reduced the overall risk. I expect these shares to trade at a discount to where they have been until there is more clarity around leadership at the department. For now, I would look for these names to base and consolidate these recent losses.
Notable
Palantir Technologies PLTR announced on Thursday afternoon that the company will transfer its listing from the New York Stock Exchange to the Nasdaq on Nov. 26. Why is the stock up 3.3% overnight? That's because the shares, already a member of the S&P 500, would then be eligible for inclusion in the Nasdaq 100, which would draw more mandated investment from funds tracking that index.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (Nov): Expecting -1.1, Last -11.9.
08:30 - Retail Sales (Oct): Expecting 0.3% m/m, Last 0.4% m/m.
08:30 - Core Retail Sales (Oct): Expecting 0.3% m/m, Last 0.5% m/m.
08:30 - Export Prices (Oct): Expecting -0.1% m/m, Last -0.7% m/m.
08:30 - Import Prices (Oct): Expecting -0.1% m/m, Last -0.4% m/m.
09:15 - Industrial Production (Oct): Expecting -0.3% m/m, Last -0.3% m/m.
09:15 - Capacity Utilization (Oct): Expecting 77.3%, Last 77.5%.
10:00 - Business Inventories (Sep): Expecting 0.2% m/m, Last 0.3% m/m.
1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 585.
1:00 - Baker Hughes Oil Rig Count (Weekly): Last 479.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: BABA (14.77), SPB (1.07)
At the time of publication, Guilfoyle was long LMT, NOC, RTX, GD, PLTR equity.
