Market Apparently Expects Dovish Fed Stance To Continue As Meeting Gets Underway

There have been two major themes arguably helping to boost stocks this year: A dovish Fed and increasing optimism about a U.S.-China trade deal.

With little news on the latter front this morning, focus could turn toward the Fed, which begins its two-day policy meeting today. With the central bank widely expected to hold rates steady this week, that leaves Fed watchers to anticipate whether policy makers will telegraph more thinking on a potential rate trajectory with a change to its dot plot. 

Another thing the market seems likely to watch for is any new insight into the Fed’s balance sheet plans, as a slowdown or halt to its bond reduction program could be one way for the Fed to try to give the economy a lift without taking the more dramatic step of lowering rates. The meeting concludes tomorrow, followed by a press conference from Fed Chair Jerome Powell.

Stocks appeared ready to resume rallying early Tuesday, with the Dow Jones Industrial Average ($DJI) going for a five-day winning streak even with the fact that Boeing Co BA has shaved about 400 points off the $DJI since the company’s troubles started last week. BA shares were down just a touch in pre-market trading.

Between Brexit and Beijing

On the other front that the market has been closely watching, media reports suggest that a summit between President Trump and President Xi of China might not happen until June, but that news didn’t appear to have much of a negative impact Monday. Maybe as long as the two sides are talking and tariffs aren’t moving higher, some investors might be willing to forgive delays. 

Markets in Asia were mostly lower early Tuesday in slow trading.

In other overseas news, the Brexit situation might be worth keeping an eye for its potential effects on European markets and the euro’s relationship to the dollar as more news potentially comes down the pike. The latest reports make it look like there might be a long delay in Brexit. They’re going to play the stall game, it appears, and that might be one factor helping buttress European shares early Tuesday.

U.S. stocks might be getting some support from a weaker dollar, as the Dollar Index fell again Monday and remained below recent highs. 

One thing that might be holding the Fed back could be low rates overseas. The German bund yield is under 0.1%, compared with U.S. 10-year yields that finished just above 2.6% on Monday. That’s a pretty wide divergence. 

Checking Resistance Levels

The S&P 500 (SPX) rose again Monday but closed just short of clearing a resistance area between 2831 and 2834, finishing right in the middle of that band. A push above that to close higher on Tuesday, if it happens, might be viewed as a sign of technical strength.

Meanwhile, the Dow Jones Industrial Average ($DJI) has a four-session win streak going. But with Boeing still under pressure, the $DJI again under-performed the SPX on Monday. 

Some analysts say follow-through buying from Friday’s rally appeared to be a factor Monday on a day when fresh news catalysts were a bit lacking.

Cyclicals Led Wall Street To Start Week

From a sector perspective, cyclicals shined Monday, which is sometimes seen as a potential sign of underlying investor confidence. Some of the leading sectors included Energy, Financials, Consumer Discretionary, and Industrials.

One sector that didn’t do so well was Communication Services, which got weighed on in part by weakness in Facebook, Inc. FB. That company’s stock had its worst day of the year, falling more than 3% amid concern about executive departures and an analyst downgrade. However, the FB softness didn’t extend much to the other FAANGs, as three of the other four rose. Amazon.com, Inc. AMZN and Apple Inc AAPL - which has been on a roll - were particularly strong. 

The analyst downgrading FB warned of strategic, regulatory and brand risks, Briefing.com noted.

Speaking of downgrades, JPMorgan Chase & Co JPM downgraded Yum! Brands, Inc. YUM, sending that stock lower in pre-market trading. Some of the food brands have done well recently, like Chipotle Mexican Grill, Inc. CMG and McDonald’s Corp MCD, so we’ll see if this is an isolated move or if it spreads.

Chipmaker stocks were mostly lower Monday ahead of Micron Technology, Inc. MU earnings later this week. Some analysts are worried about falling chip pricing and how that might factor into the company’s quarter.

So far this year, the SPX is up just over 13%, while the DJI is up just above 11%. The Nasdaq Composite (up 16.3%) is out-performing both. Meanwhile, volatility, as measured by VIX, rose just slightly on Monday but remains near 2019 lows just above 13.

Crude Jumps

U.S. crude prices hit a four-month high and are threatening $60 a barrel after OPEC canceled its April meeting and Saudi Arabia said output cuts might extend into the second half of the year, according to media reports. Crude struggled a bit late last week amid economic fears, but anyone who was hoping OPEC might turn up the spigot or even say a few bearish words at the April meeting was probably disappointed with Monday’s events.

One question is whether rising oil prices might start to have an impact on commodity-sensitive stocks. Energy stocks performed well on Monday, which might stand to reason, but so far the higher crude costs haven’t seemed to hurt transportation-related companies. The Dow Jones Transportation Average ($DJT) rose Monday. That index has been recovering the last week after a long slide in early March. This could reflect consumer health.

Yielding Less: The yield on the 10-year Treasury has been moving lower in recent sessions. Part of that may be because foreign investors might be piling into U.S. Treasuries to get better yields than they can get at home, boosting Treasury prices, which move inversely to yields. Data Source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Fed Funds Futures: Investors appear to see more of a chance for declining rates than rising ones. While the CME futures market, as of Monday, put chances of any rate move this week at less than 2%, the market shows no chance of a hike at the June meeting and a nearly 15% chance of a rate cut by that time. Looking farther ahead, the futures market sees more than a 25% chance of rates being lower than they are now by the end of the year, and zero chance of them being higher. That’s quite a turn-around from late last year, when historic data shows the futures market was pricing in around a 40% chance of at least one rate hike in 2019.

Silver Linings: If we end up seeing strong earnings from FedEx Corporation FDX after the close today and Nike Inc NKE later in the week, it could help to back up what some of the economic data have been telling investors about U.S. consumers being in good shape. It appears consumers are out continuing to spend money and help keep the economy going. That may be a counterpoint to worries about slowing economic growth. True, GDP forecasts have been trimmed and clouds continue hanging over the global trade situation. But it’s not all doom and gloom. Though the February jobs report was disappointing, many analysts are writing it off to some extent due to cold weather that month and the lingering effects of the government shutdown. Other data, including last Friday’s better-than-expected March University of Michigan Consumer Sentiment report and last week’s January retail sales report, arguably could serve as counterweights to the weak jobs data. 

Affordability Still An Issue: While mortgage rates have been falling, overall home affordability continues to be a headwind for the housing market. “Affordability still remains a key concern for builders,” the National Association of Home Builders said in a press release Monday. “The skilled worker shortage, lack of buildable lots and stiff zoning restrictions in many major metro markets are among the challenges builders face as they strive to construct homes that can sell at affordable price points.” However, more builders are reporting that lower-priced houses are selling well, echoing the data in the new home sales report last week. A report on February existing home sales is due out later this week. It might be interesting to see if a drop in borrowing costs has given consumers new appetite for home buying as mortgage rates have generally been declining since late last year.

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