In a perverse feedback loop, bad news is good for stocks in the lead-up to the July 31st FOMC meeting. If market conditions worsen, the assumption by many traders is that the Fed will cut interest rates by 50 basis points instead of 25, thus what we've seen this week, with contraction-level PMIs in Europe and China pushing US equities higher.
Likewise, today's Automatic Data Processing Inc. (ADP) private-sector labor report came in weaker than expected, with 102,000 non-farm jobs for June, but stocks showed modest gains early in a holiday-shortened trading session. Gains were strongest in the service sector, with losses in small business. Meanwhile, the S&P 500 posted another new all-time intraday high.
Investors would be wise to proceed with caution, as this game of buying into bad news may result in losses at the end of the month if the Fed decides to cut by just 25 points.
Oil futures were up in early trading following a two-week low yesterday, but retraced after news that US oil supplies fell far less than expected. Brent crude was up 69 cents at $63.03/barrel. US gasoline inventories were down less than expected ahead of the July 4th holiday.
On Twitter yesterday, President Donald Trump announced two picks for the Federal Reserve Board, Christopher Waller and Judy Shelton. Waller is a veteran of the Fed, having worked at the St. Louis Federal Reserve Bank, and a lifetime dove on interest rate policy. Similarly, Shelton has called for lower interest rates. She was formerly an adviser to Trump.
Both candidates were almost immediately criticized in the press. The Senate confirmation process takes months, and no previous picks of Trump's have been approved. If Waller and/or Shelton are confirmed, they will likely not sit on the board until later this year or into 2020.
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