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Fed Remains Concerned About U.S. - China Trade War

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This morning, with no economic reports expected to inform investors with new macro-data, our pre-markets — up once again today — are turning to public commentary from Fed presidents, along with the release of minutes from the Fed’s last meeting, at which time interest rates rose another 25 basis points and set in motion a fresh wave of stock selling for most of December.

Before parsing these comments, however, we see a report from Japan’s Nikkei, whereby Apple (AAPL - Free Report)  looks to be cutting production by 10% in the first quarter of calendar 2019. This is fairly consistent with the guidance warning last week from the iPhone maker, whereby weaker-than-expected sales in China were pushing down revenue expectations for Apple’s upcoming quarterly report.

Since its October highs, Apple shares are trading down more than 34%, and its forward Price-to-Earnings ratio is currently down around 12x — much more like an industrial manufacturer than a tech growth giant. Shares in today’s pre-market are trading right around even, having priced in this bad news last week when the company warned on its fiscal Q1 top-line.

Fed Members Heard From

This morning, Atlanta Fed Chair Raphael Bostic expressed concern regarding tariffs affecting the U.S. economy. He said Fed members are seeking “greater clarity” on the direction for the economy going forward, which is consistent with his previous comment that 2019 should see no more than one further quarter-point interest rate hike. Bostic is not currently a voting member on Fed funds rate policy.

One Fed member who sees things a bit differently in Chicago Fed President Charles Evans, who remains relatively hawkish on Fed policy this year: this voting member sees as many as three quarter-point hikes in 2019. Evans said he is seeing if “downside risks dissipate” and “fundamentals continue to be strong” in order for this to be the case. Evans seemed to imply a March hike is off the table, and that the first move might come mid-year, depending.

Boston Fed chief Eric Rosengren is schedule to provide a public statement ahead of the noon hour (Eastern) today, followed by the Fed minutes from its December meeting this afternoon.

What appears to be developing is a wait-and-see attitude for the Fed, not only being “data dependent” generally, but observant of the U.S. trade war with China specifically. Depending on whether an agreement can be reached or the pain for both economies will be prolonged over a longer period — meanwhile with global growth overall remaining sluggish — will be the trigger for a leg-up in domestic growth this year. And this is where Fed members look to step in and crank up interest rates from its current (still historically low) range of 2.25%-2.50%.


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