A tumultuous week in the stock market where a large draw-down on Thursday was followed by an up-day and nirvana on Friday. So, what happened on Friday and is it a bottom?
Let’s walk through the timeline where each step below caused the market to keep pumping higher into the close on Friday:
- Thursday’s session opens with a revenue warning from Apple and closes near the low and in an oversold condition (Dow closes down over 600pts). Normally, you could expect a moderate bounce the following session unless the market goes into globe-thermonuclear sell-off mode.
- Anyhow, in the overnight session coming into Friday morning, the People’s Bank of China (PBOC) cut reserve requirements for their banks by 1% which equates to roughly $115B of stimulus to their ailing economy starting later this month. Think of this an injection of liquidity like the Fed used to do with their bond buying program. China’s economy and stock market are in the doldrums so I doubt this is the last round of stimulus for 2019.
- The U.S. jobs numbers were released at 8:30AM which were much better than expected (see below) and took everyone by surprise. Media pundits heads exploded on the number.
- Later that morning……..the aristocrats assemble to perform the same routine we have seen many times over. Fed Chairman Powell along with Former Chairs Bernake and Yellen have a televised roundtable of backslaps and self-congratulatory quips on the “success” of the Fed’s policy moves since the financial crisis. Chairman Powell uses this opportunity to walk-back his comments from December by changing “data dependent” to “patient” on the Fed’s 2019 stimulus withdrawal. Of course, this nuanced shift had NOTHING to do with the market being down 600+points the day before.
What the Fed is fighting is a bear market in stocks while NOT having a recession for the American worker. I don’t envy Powell’s position. Here is the rub, the Fed has to withdraw stimulus as the economic data (jobs) has painted them into a corner giving them no excuse to maintain this level of accommodation. They have no choice now but to keep raising interest rates and shrinking their balance sheet for 2019. The real irony is that both Yellen and Bernake had ample opportunity to start this process in 2013 when the stock market rose 30%. As with most aristocrats, the can was kicked down the road and Powell now holds the bag.
In The Chart:
Chart of the Week!
Economic & Central Banking Snippets
- China’s manufacturing showed contraction for the month of December. The Caixin/Markit Manufacturing PMI fell to 49.7 last month from 50.2 in November, dropping below the critical 50 level that separates growth from contraction. China’s economy has been red hot for the past decade, but there are concerns that its 6-7% annual growth is not sustainable, irrespective of a trade war. This chart from Pantheon Macroeconomics paints the picture no one wants to see.
- Non-farm payrolls climbed 312,000 in December, the labor department said on Friday. This far surpassed market expectations of 177,000. Wage growth increased as well with average hourly earnings up 3.2% year-on-year — the quickest pace since 2009. The unemployment rate ticked up to 3.9% which is normal when more people come into the labor force and are actively seeking employment.
- The Institute for Supply Management said the reading for its manufacturing index came in at 54.1 last month, its weakest level since November 2016. That compares to the previous reading of 59.3 and badly missed consensus expectations for 57.5.
- Existing home sales continue to drop in November, down 4.5% YoY and down 2.3% YTD. Total housing starts continue to fall with a 2% YoY drop. The YTD outperformance now stands at 5.1%. 5+ unit starts rose sharply to 22%. (MS)
Macro Snippets
- Apple issued an extremely rare revenue warning late on Wednesday, blaming economic weakness in China and disappointing iPhone upgrades in the developed world for a shortfall of as much as 10% from its previous expectations.
- China has successfully landed its Chang’e 4 spacecraft on the far side of the moon, becoming the first in history to touch the lunar surface unseen by those on Earth. China’s next plan is to put astronauts on a lunar base in the 2020s and send several probes to Mars. The space race is heating up on multiple fronts, with President Trump seeking to create a “Space Force” and numerous companies aiming to commercialize space travel, like SpaceX (SPACE). (Seeking Alpha)
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Regards,
Paul J. McCarthy, III
President – Kisco Capital