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Investors not buying what Powell is selling: At the Open

Sep. 17, 2020 9:10 AM ETFinancial Select Sector SPDR® Fund ETF (XLF)XLF, XLK, JPM, C, WFC, KBE, FXBBy: Kim Khan, SA News Editor54 Comments
  • The Bank of England is stealing some of the Federal Reserve’s thunder this morning.

The BoE says it will start “structured engagement” with U.K. banking regulators on a way to possibly implement negative interest rates.

Pound Sterling (FXB-0.7%) fell sharply against the dollar after the news broke.

The BoE isn’t inclined to make such a big move yet, but even making preparations is drawing a sharp distinction to the Fed, where, a day after its policy announcement, markets are expressing skepticism that there is much more it can do. 

Fed chief Jerome Powell insisted at this press conference that the Fed had more “ammo”, but like former Treasury Secretary Hank Paulson’s bazooka, that ammo isn’t so effective unless you fire it.

The main bone of contention looks to be the Fed’s prediction of inflation, which doesn’t reach the 2% target level until 2023. Given the shift in policy that lets inflation run hotter than 2% for a time, that means the Fed isn’t expecting a clear recovery for more than three years. And yet the Fed isn’t doing more on the stimulus side.

If there are plenty of more measures it can use to juice the economy and inflation, as Powell says, why isn’t it using it? Why aren’t more asset purchases indicated? And why isn’t it at least contemplating negative rates?

With history as a guide, the market is probably right in betting that the Fed is setting itself up for failure, according to Lisa Hornby, U.S. fixed income portfolio manager at Schroder Investment.

“If you look at other central banks, namely the Bank of Japan, who have tried these programs before, anchoring inflation, committing to an inflation target, combining that with a fiscal target and still you’ve not seen inflation run above 2%,” Hornby told Bloomberg.

With so much excess capacity in the economy in the near term, it will be some time before aggregate inflation can get to above 2%, she adds.

The stock market had little time to assess all of Powell’s press conference before the closing bell (his one-liners in the same vein as “not thinking about thinking about thinking” such as “moderate means moderate” or “maximum means maximum” in terms of employment seemed more obfuscation than emphasis). 

But this morning the determination seems to be the ammunition is full of duds.

The 10-year Treasury yield is below 0.65%, down about 4 basis points. The 10-year TIPS is at -1.01%, putting the breakeven inflation expectations at 1.66. That’s back down to levels seen in mid-August.

The SDPR Financial Sector ETF (XLF-1.3%) is one of the bigger premarket losers, with Citi (C-1.6%), which has been fighting a technical breakdown and bounced yesterday, J.P. Morgan (JPM-1.6%) and Wells Fargo (WFC-1.4%) off more than 1%.

The SPDR S&P Bank Index ETF (NYSEARCA:KBE) is steady, but off more than 5% in the past month at a time when money was moving sharply out of technology stocks.

Sector Watch

Technology (NYSEARCA:XLK) is taking it on the chin again premarket. And XLK is falling below its 50-day simple moving average of $113.45.

High-flyers Nvidia and Apple are seeing sharp moves to the downside again.

See more market-moving events in Seeking Alpha's Catalyst Watch.

 

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