By Pete Biebel, Senior Vice PresidentPrint This Post
I’ve never been in a pawn shop, but I think I understand how they work. If I needed to pick up a little cash, I could take something of value I own to the pawn shop. The shop would buy the item from me with the mutual understanding that I could buy it back at some point in the future. I get my short-term cash along with the option to repurchase the thing I pawned in the near future.
The Federal Reserve Bank of New York got into the pawn business last week for the first time in over ten years. The overnight bank lending market locked-up early in the week. Banks were looking to borrow more money to meet short-term funding needs than the lending banks were offering. There was suddenly a lack of liquidity in the inter-bank lending market. The overnight interest rate spiked to its highest level since 2009. The Fed responded by executing about $60 billion in repurchase agreements or “repos.” The banks, in need of short-term cash, sold Treasury and mortgage securities to the Fed with the understanding that they would repurchase those securities in the near future. The cash infusion restored the necessary level of liquidity.
The Fed continued to execute repos over the next several days and effectively quelled the liquidity scare. What initially sounded like a breakdown in the banking system turned out to be no big deal. With the Fed coming to the rescue, the market barely budged. And that was the second time the market shrugged off potentially destabilizing news in the week.
The week began with a scare in the energy market. News of a weekend drone attack on a Saudi oil facility fueled a near 20% spike up in the price of crude oil. The facility is the world’s largest oil processing plant; its output represents about 50% of Saudi oil production and about 5% of global daily oil supply. Crude hit $63 for the first time in four months on Monday morning, but spent most of the rest of the week back in the high-$50s after the Saudis assured the market that production would be restored by the end of October. Stocks gapped down on the opening Monday, but the damage was well contained. The S&P Index of Energy sector stocks gushed about 4% higher early Monday but dribbled lower over the balance of the week as Crude prices receded.
In a follow-up on the above comments, this week seems likely to begin with another rally in Crude Oil. Late Sunday the Wall Street Journal reported that the time required to restore operations at the damaged facility could take up to eight months rather than the eight-to-ten weeks of the original estimate.
The second half of the last week suffered two counteracting bouts of volatility. The initial spasm from the Fed policy statement on Wednesday afternoon was a quick dip that dropped the major averages to their lows of the week. Apparently, upon further reflection, the market liked the Fed’s prognostications; the Dow Jones Industrial Average (DJIA) rallied from a 200+ point loss to a small gain in the final ninety minutes of trading.
Then, on Friday, with the averages drifting just below their record highs, news, that a trade delegation from China had abruptly ended negotiations, purged the recently inflated hopes for a trade deal. Stock indices sank about one percent in the following twenty minutes. The S&P 500 Index (SPX), which had been near 3020 and within a whisker of its record high, fell back below the 3000 level. SPX ended the week near 2992, down about 0.5% for the week. The NASDAQ Composite Index (COMP) had a net loss of about 0.7% and DJIA lost a bit more than 1%.
The Ten-Year Treasury yield ended the prior week at its highest level in about six weeks, near 1.9%. The combination of the Fed liquidity infusion and the quarter-point cut in the Fed’s benchmark rate helped Treasuries rally through the week. The Ten-Year rate ended the week back down at 1.72%. The rally in Treasuries helped two interest rate sensitive sectors, Utilities and Real Estate, outperform all other equity sectors on the week.
The Russell 2000 Index of small-cap stocks (RUT), which had ripped higher in the previous week, seemed to be instilling hopes that small-caps were back in the game. Unfortunately, the group resumed its recent habit of underperforming; RUT lost about 1.2% for the week.
SPX blasted above the 3000 level about ten days ago but has just been waffling around that level since then. At its best, the index has poked up to within six to eight points of its record high a couple times but could go no further. Friday’s ending level near 2092 was the lowest closing value in the past eight trading sessions. While it’s discouraging that the market has seen so little follow-through after SPX reclaimed 3000, so far there’s been no significant damage. The critical level for SPX seems to be in the 2040-2050 range. Until that level is taken out, there’s no cause for alarm. I continue to believe that if/when SPX hits a new high, it’s not likely to rally much beyond the 3040-3050 area.
This week brings a long list of updates on economic data. The GDP numbers on Thursday and the Durable Goods figures on Friday seem to be the most likely to spark any sizeable reaction in stocks. As has been the case over the past several months, random headlines regarding the trade war with China, if and when they occur, are likely to be the most significant catalysts for market action.
|Monday 9/23/2019||Chicago Fed National Activity Index||-0.36||-0.06|
|PMI Composite – Flash||50.9||51.2|
|Tuesday 9/24/2019||S&P Case-Shiller Home Price Index, M/M||0.0%||+0.1%|
|FHFA House Price Index, M/M||+0.2%||+0.2%|
|Richmond Fed Manufacturing Index||1||-2|
|Wednesday 9/25/2019||New Home Sales, SAAR||635K||665K|
|Thursday 9/26/2019||GDP, Q/Q, SAAR||+2.0%||+2.0%|
|International Trade in Goods, Trade Deficit||$72.3B||$73.4B|
|Wholesale Inventories, M/M||+0.2%||+0.3%|
|Pending Home Sales, M/M||-2.5%||+0.6%|
|Kansas City Fed Manufacturing Index||-6.0||-3.0|
|Friday 9/27/2019||Durable Goods Orders, M/M||+2.1%||-1.2%|
|Durable Goods Orders, Ex-Transportation, M/M||-0.4%||+0.2%|
|Personal Income & Outlays, Income, M/M||+0.1%||+0.4%|
|Personal Income & Outlays, Spending, M/M||+0.6%||+0.3%|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market