Ahead of the market opening on this hump day, investors feel in a win-win position: whether the U.S. and China are able to reach a “skinny deal” in their trade war — rolling back some past tariffs and freezing others (even as verbal attacks between the two countries escalate elsewhere) — or whether the Fed accommodates potential realities such as a protracted trade war, market participants are in a buying mood. This is also off fairly heavy selling earlier this week, bringing about some attractive valuations on the exchanges.
Fed Chair Jay Powell will continue addressing the public for a second consecutive day, after announcing the Federal Treasury will be expanding its balance sheet “soon.” However, though buying back t-bills is apparently a major part of the Fed’s new plan, Powell stated “in no sense is this QE.” Quantitative Easing, as you will recall, is what former Fed Chair Ben Bernanke employed to help dig us out of the financial hole created by the mortgage crisis that brought on the Great Recession a decade ago.
Powell said the plan to buy back securities holdings is intended “to maintain an appropriate level of reserves.” This would indicate he clearly is bracing for headwinds to come, perhaps including a possible global recession, Brexit and the ongoing U.S.-China trade war, now entering its second year. Analysts have also traced this new direction to difficulties the market had experienced recently in the overnight lending market, where repo rates spiked to as high as 10%.
As Powell once again makes his address this afternoon, we expect some clarity regarding the Fed’s plans and its reasons behind them. As far as interest rates, yesterday Powell said the Federal Open Market Committee (FOMC) will remain “data dependent.” Though there is no pre-set course for cutting interest rates going forward, there remains a high likelihood of another 25 basis-point cut later this month. This would be the third such cut in the past 3 1/2 months, and the first time the rate would sink below 2% since the first half of 2018.
Also after the bell, minutes from the last Fed meeting will be released, again in the service of clarifying voting Fed members’ thinking in terms of setting future policy while a thicket of financial brambles lie in wait. Also August Job Openings and Wholesale Inventories will be released later this morning, following 7.2 million openings reported in July and +0.2% on inventories this past mid-summer.