1. Moving the markets

Sometimes you just have to laugh out load. Today was such a day, as data showing that US Manufacturing dropped to its weakest in 10 years, or more specifically since September 2009. One analyst suggested that the goods producing sector is “on course to act as a significant drag on the economy in the third quarter.”

That is truly terrible news, but it was greeted on Wall Street as “terrific” with the major indexes staging a huge rebound, after yesterday’s drubbing, with the Dow being up at one point over 300 points.

Then came unexpected “bad news 2.0” in the form of Trump’s announcement that he will add a 10% tariff on the remaining $300 billion of Chinese imports starting in September.

That caused an instant trend reversal, and the major indexes dove south with the Dow at one point being down over 300 points. All gains evaporated within minutes, while the 10-year bond yield also did its best swan dive imitation by reaching a yield that is now below the Trump election lows.

That caused the “jaws of death,” as ZH termed it, first to widen and then to narrow. In case you missed it, they simply represent a divergence between the 10-year yield and the S&P 500, which sooner or later will have to “normalize.” The question remains whether it will be via a crash in the S&P or a hike in bond yields or a combination of both.

Will history repeat itself as this chart comparison to 1987 seems to indicate? Only time will tell, but it’s good to have an exit strategy; just in case.

1. Moving the markets

The Fed did what was expected by cutting interest rates by 0.25% for the first time in 11 years. Of course, on Wall Street, expectations don’t mean much, unless you beat them. The Fed failed to do that, and the markets tanked with the Dow at one point being down some 400 points.

What created most of the damage was Fed head Powell’s press conference, during which he appeared dazed and confused, after a barrage of questions forced him to explain his reasoning. He said that the US economy is doing great, confidence is rebounding, while the 0.25% was an “insurance” cut.

Then he revealed that today’s rate reduction was just a “mid-cycle” adjustment and not the start of a “long series of rate cuts.” That shook and stunned the markets, as several more cuts were assumed to be forthcoming. One analyst summarized it like this:

“The market was fine with the statement, but as seems to be the case, the press conference reveals details that do not sit well with the market. The response that this is a mid-cycle adjustment and not part of a longer-term accommodative stance has raised concerns. The market has really talked itself into a need for lower rates. Obviously the FOMC still feels strongly the economy is resilient.”

That means the widely anticipated easing cycle over the next six months will not happen, which this cartoon sums up perfectly. Powell now holds the dubious record of having held 12 press conference, of which 10 of them were followed by stocks tanking.

Still, while volatility returned with a vengeance today, for the month, the major indexes gained, led by the Nasdaq, while SmallCaps fared the worst.

It will be interesting to see if the markets will adjust to the “Powell theme,” or if there is more fallout to come over the next week or so.

1. Moving the markets

While the major indexes recovered form an early session dump, they pretty much repeated yesterday’s theme by slipping and sliding below the unchanged line without much directional conviction.

A mixed earnings picture today, along with some negative tweets from Trump regarding a possible China deal, added to today’s uncertainty and kept equities in a tight range.

As a I posted before, tomorrow will be the most important trading day of the year, as the Fed is scheduled to release its verdict on interest rates. Opinions as to its market effect and whether they should or shouldn’t cut rates have been all over the place.

ZH offered a comparison to the events of 1987 via this chart posing the question: Is the Fed rate-cut enough to make new highs in stock…just like we did in 1987?

We should know the answer to that in the very near future.

1. Moving the markets

While the earnings season continues, traders were more concerned with what the Fed will decide regarding interest rates, when it concludes its two-day meeting on Wednesday. Will they deliver another hoped for sugar high for the economy and the markets, or will the outcome be a dud?

A 0.25% reduction in rates has been baked in the cake, and any disappointment there would have negative consequences for equities. However, even if they meet this low end of expectations, and not reduce by the desired 0.5% whisper number, discontent may spread anyway, and we could witness a sell-off after the recent relentless move higher.

After all, eventually, investors and trades will wake up to the fact that lower rates are a sign of declining economic activity and not an indication that all is well. Rising rates represent an economy firing on all cylinders, a condition that therefore needs to be reigned in due to the possibility of inflation getting out of hand.

We will find out in a couple of days what the reaction will be and if traders will sell the Fed news. In the meantime, the markets will likely limp along directionless, as they did today.