Powell Talk: Investors Await Word From Wyoming As Fed Takes Center Stage

The market awaits Fed Chair Jerome Powell’s speech this morning in Jackson Hole after trade talks with China ended without many new developments.

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Key Takeaways

  • Fed Chair Powell’s speech in Jackson Hole front and center this morning


  • China trade talks wrap up with no news of major developments


  • Another round of retail earnings in focus


(Friday Market Open) The market is on pins and needles this morning as investors await word from Jackson Hole, where Fed Chairman Jerome Powell is scheduled to speak. Stocks moved slightly higher in pre-market trading, but the speech might ultimately help determine Friday’s path.

Bonds and gold edged slightly higher ahead of Powell’s speech, while the dollar lost a little ground vs. the euro but remains near recent peaks. European and Asian stocks mostly rose overnight. U.S. and China trade talks ended yesterday with no signs of major progress, according to media reports.

In addition, another round of retail earnings hit the Street early Friday, with Gap (GPS) shares taking a tumble after the company reported a drop in same-store sales at Gap stores. Same-store sales did climb for other brands like Old Navy and Banana Republic, however. 

And shares of Foot Locker (FL) inched higher as the company slightly beat Wall Street analysts’ projections for earnings and revenue. So it’s kind of a mixed bag for the retailers this morning.

On the data front, durable goods for July came in worse than expected, falling 1.7%. Wall Street analysts had been looking for a drop of 0.6%. However, the core number, which strips out transportation, was up 0.2%, just a bit below the 0.4% expected. It looks like volatility in the airline sector drove the primary number, but the market is likely to discount the report because at the end of the day, earnings this week have arguably confirmed the health of the consumer.

Fed Front and Center

By the time you read this, Fed Chairman Jerome Powell is likely to be talking in Jackson Hole. His focus could be on any number of topics, but anything he says about the inflation or growth outlook is likely to get the most attention from investors. Another Fed hike is basically baked into the futures market for next month, so it seems unlikely he’d say anything that would change minds about that. 

Consider listening, however, for anything Powell might say about overseas markets, many of which are still struggling with sluggish economic growth and low rates. This could play into how the Fed ultimately makes policy as the U.S. economy continues to grow much faster than many foreign ones. Another topic to potentially monitor is anything Powell says about U.S. wage growth, which by some measures still lags, and if he has any new insight into the narrowing U.S. yield curve. The speech is called “Monetary Policy in a Changing Economy,” and begins at 10 a.m. ET.

One interesting perspective came from Marketwatch, which speculated that Powell might discuss the Fed’s policy options in the event of an economic downturn. This was a topic of discussion at the last Federal Open Market Committee (FOMC) meeting. 

Earlier Friday, financial news networks reported that St. Louis Fed President James Bullard, not a voting member of the FOMC this year, said if it were up to him he wouldn’t raise rates again in 2018. He warned that the economy might slow and doesn’t see a need for the Fed to be pre-emptive.

Caution Still Appears Elevated Amid Political Tension

Back in Washington, D.C., political tensions have been rising lately, and that might be contributing to the cautious air on Wall Street. Again, this is what’s known as headline risk. Sometimes when investors get fearful about what might flash across their screens next, they tend to reduce their exposure to more aggressive parts of the market. This is probably one reason U.S. Treasury notes have performed so well lately, with 10-year yields scraping against the 2.82% level, down from as high as 3% earlier this month. This could be something the market struggles with for a while, because at least historically, these kind of political things tend to last a while. However, the fact that yields have so far held above 2.8% seems to indicate that at least up to now, fear hasn’t become too advanced.

VIX, the closely watched “fear index,” rose just a bit on Thursday but stayed below 13. That’s not territory that would seem to signal a great deal of wariness among investors, 

In another possible pushback against fear, info tech shares continue to shine, representing the one relatively bright spot of the market on an otherwise rather tepid Thursday. The sector is still underperforming the broader market over the last month, in part due to pressure from some disappointing earnings news. However, it seems like some beaten down shares are drawing investor interest at lower levels. Software and semiconductor companies were among the gainers on Thursday.

Overall, the latter part of this week hasn’t been too exciting for most of the market, in part amid the Washington caution and as investors awaited Powell. Still, the S&P 500 Index (SPX) is up about 1.4% so far this month, and the Nasdaq (COMP) had a five-day win streak broken Thursday. The SPX isn’t far from its all-time high, and set an intraday high this week.

FIGURE 1: What’s Hot? Over the last month or so, small-cap stocks in the Russell 2000 (RUT), have been outpacing the S&P 500 (blue line), as some investors seem to be gravitating to small-caps in hopes they might have less exposure to possible tariffs. Nasdaq (purple line), with its focus on tech, might be benefitting from the same thing. Data Source: S&P Dow Jones Indices, Nasdaq, FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Dollar Outduels Pound Sterling: After weakening a bit earlier in the week, the U.S. dollar has begun to turn it around vs. other currencies, the British pound in particular. Some of the dollar’s strength might stem in part from the Fed minutes released Wednesday, which didn’t appear to show much, if any, hesitation about another rate rise next month. Investors also might be embracing the dollar amid concerns over U.S./Chinese trade talks and how they might turn out, analysts said. In this case, the dollar could be seen as a possible defensive investment in case trade jitters start looming larger.

The pound sterling also faces some factors of its own, notably concern over the next steps with Brexit. It’s been sliding sharply vs. the dollar the last six months. The slow pace of negotiations between Britain and the rest of the European Union is raising fears that Britain might leave the E.U. in March without a transition deal to keep it temporarily in the bloc’s single market and customs union, media reports noted. That’s something to consider watching over the longer term, because it’s possibly another factor playing into dollar strength. A strong dollar can sometimes weigh on U.S. multinationals.

More Retail Rambling: We’ve already talked a lot this week about the long run of healthy retail earnings, but one more thought. What we’ve seen in retail differs a bit from some other sectors, notably technology, because in retail a rising tide seems to be lifting almost every boat. Info tech is different, because one company’s analyst upgrade is almost always at the expense of someone else. For instance, Advanced Micro Devices (AMD) recently received an upgrade from a well-known analyst, but at the expense of Intel (INTC). It’s very much black and white.

It’s different in retail. People have more money in their pockets and seem to be shopping at more stores. They might buy at Lowe’s (LOW), but also at Target (TGT). There’s increased foot traffic to many of these stores and increased web traffic. This is the kind of thing that sometimes happens in a growing economy. That might help explain why consumer discretionary has been one of the fastest growing stock sectors over the last three months, and why consumer staples is also beating the broader S&P 500 Index (SPX) over that period.

Looking to Buy a New Home? If so, you’re probably one of a smaller pool of buyers, July’s new homes report released Thursday suggests. The data showed sales at a seasonally-adjusted 627,000, compared with the 645,000 that Wall Street analysts had projected and down from 638,000 the prior month. It was the second consecutive month of falling numbers. It was also the second bit of bearish housing data this week, as existing home sales also fell on a month-over-month and year-over-year basis. Supply and price pressures seemed to choke existing home sales, while new home sales dropped even as the average sales price rose 5.9% to $394,300. Inventories also rose. 

Housing data have been faltering lately, and remain a key factor to consider watching. Sometimes, though certainly not always, housing weakness can signal broader issues in the economy. However, the impressive retail earnings season that’s wrapping up suggests consumers might be pretty healthy, just not ready in all cases to buy a new home. Today’s durable goods report is the latest to deliver word on the state of the consumer.

Good Trading, 

JJ

@TDAJJKinahan 

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