The market closed about unchanged, as this has been a week of trading on pins and needles. But this is the big day, and perhaps, the biggest moment for Jerome Powell as Chairman of the Federal Reserve.
As if there wasn’t enough pressure on Powell & Co, the yield on the ten-year treasury bond is spiking this morning through former support levels that temporarily held as resistance.
Yesterday’s survey of global fund managers by the Bank of America (Merrill Lynch) saw 43% suggest the yield hitting 2.0% would trigger a ten percent pullback in the S&P 500. I’m not sure I agree with that, but if we get to that level with the kind of velocity we are seeing now, there is sure to be a scare that triggers selling first and waiting for answers later.
The NASDAQ Composite has been more vulnerable to these bond yield spikes led lower by Big Tech names.
Right now, the NASDAQ Composite is in a perfect pennant formation, which suggest a significant move on the near-term horizon.
On the upside, a close above 13,610 probably triggers a stampede of buying.
On the downside, there are pockets of support, but the next big test is way down around 12,500.
Portfolio Approach
We took profits and added to Consumer Discretionary in our Hotline Model Portfolio yesterday.
Today’s Session: The Dot Plot Thickens
You have heard of the Fed’s dot plot designed to communicate potential changes in policy. The effort has its critics, but for now, it’s a crucial part of the FOMC gathering. Today will be more important than ever.
There are 18 members of the FOMC, of which 11 are voting members at any given time.
In December, five members of the FOMC (see red circle) signaled the likelihood rates would be higher in 2023. That left the median rate target at 0.0% to 0.25% level. But it also means one defection and the entire perception of the Fed changes with the median view shifting to a rate hike in 2023.
Since the December meeting, the composition of voting members on the FOMC has changed with the two most hawkish members no longer voting this year, leaving only one hawkish voting member.
Moreover, Christopher Waller, who was nominated to the Federal Reserve Board of Governors by President Trump, is also considered a dove. That suggests a very dovish voting block at the FOMC this year, but future years could see more hawks in the mix.
We enter the day with less certainty about the Federal Reserve than we’ve had a long time. If a more members lift their view on 2023 rates, it would be a signal that Powell has less control over policy, which makes it much harder to deliver on his promise of no rate hikes through 2023.
That makes this the most important FOMC decision day in years.
To see the chart, click here.
Economy Hits Speed Bumps
Yesterday, the Atlanta Fed lowered its first quarter GDP estimate after the big miss in retail sales to 5.9%, but keep in mind, the estimate was 10.0% on March 1st.
To see the chart, click here.
Residential Construction
The US building boom hit a speed bump last month with permits and starts coming below consensus.
Permits came in at an annualized pace of 1.682 million, the street was looking for 1.75 million.
Permits February 2021 | Total | Month change | Year change |
Single Family | 1,143,000 | -10.0% | +15.0% |
Condos (5 units+) | 495,000 | -11.6% | -2.2% |
2 to 4 Units | 44,000 | -27.4% | -2.2% |
Starts came in at 1.421 million annualized pace, but consensus expected 1.560 million.
Starts February 2021 | Total | Month change | Year change |
Single Family | 1,040,000 | -8.5% | +0.6% |
Condos (5 units+) | 372,000 | -14.5% | -27.6% |
I’m not sure how much of this was influenced by weather, but other factors, including the surge in lumber prices and worker shortage, played pivotal parts. The street actually liked the numbers.
Any slowing in economic data adds to the notion inflationary threats are only temporary and giving Chairman Powell more ammunition to come out guns blazing.
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