The drama surrounding Greenland has cooled off and Wall Street will be turning its energy towards the hundreds of earnings reports that will be released in the next two weeks. Wednesday looks to be the biggie as we hear from Microsoft, Meta, Tesla which add up to just over $7 trillion in market capitalization. We will also hear from Apple, the credit card companies and a few semiconductor companies that compete with NVIDIA.
Also, we will see some significant economic data with durable goods, the producer price index (inflation in the pipeline) and the Fed policy statement on Wednesday at 2PM. This meeting will be of particular focus as the inflation data last week could alter the Fed’s timing on when/if there will be another rate cut.
Fed Chair Powell will also get many questions about the ongoing subpoenas from the Justice Department and who will lead the Fed once his term is over as Chairman in May. Will Powell fight back and make a stand or will he retreat and refuse to answer questions?
Here are a few data points that may come up to the Chairman by the press:
- Pending Home Sales: Plunged -9.3% MoM vs. -0.3% forecast which may signal housing demand weakness.
- Mortgage applications: Up 14.1% but still well below prior week’s 28.5% surge.
- Construction Spending: October revised to +0.5%, but September was negative -0.6%.
- Q3 GDP: Final reading came in at 4.4% vs. 4.3% forecast – solid upward revision.
- Real Consumer Spending: Confirmed at robust 3.5%.
- Core PCE Q3: Held at 2.90% as expected – still elevated above Fed’s 2% target.
What is Powell Leaving the Next Fed Chair?
If you don’t know, there is roughly $3 trillion in reserves deposited by member banks at the Federal Reserve that are paid 3.65% annually ($111B). By adjusting this rate, the Fed influences banks’ willingness to lend money versus keeping it on reserve, which affects broader economic conditions. This is a relic of the financial crisis from 2008 and now provides an incentive for banks NOT to lend out money to their customers. This is part of the policy consideration for the Fed and a new Chair may take this freebie away from the banks.
We must also keep in mind that there are $6.5 trillion in securities held by the Fed so if you combine the two that is $9.5+ trillion of capital NOT circulating in the private marekts.
One lesson from COVID we all learned is that if you shut-down businesses then you stop making goods which economists call the ‘supply-side’ of the economy. In turn, prices rise because there are less goods to buy.
Ultimately, the private sector needs to be the provider of inflation relief and Chair Powell stated as much a few years ago when the Fed began raising interest rates. If we are going to re-ignite the manufacturing base of the United States, then much of this capital needs to be re-directed towards private lending. Unfortunately, I rarely see the Fed officials challenged on this situation. This will be something the next Fed Chair will also have to tackle.
The Yield Curve
The shape of the yield curve continues to steepen over the past few months as growth prospects may be driving long bond yields higher. Also, I don’t see the inflation numbers dropping anytime soon unless the economy hits a road bump.
The S&P 500
Stocks continue to be rangebound and have been consolidating since October. Perhaps, earnings will push us over the Fibonacci resistance at 6975 if the numbers look good. Stay tuned!
Thank you for being a subscriber!
President, Kisco Capital
