Axios Markets: An uncertain Fed for an uncertain time

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Axios Markets

By Dion Rabouin ·Sep 17, 2020

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🗓 I'm on vacation tomorrow, but Courtenay Brown will take the lead for Markets and I'll be back in your inbox on Monday.

🎙 "I am tired of the sickening sight of the battlefield with its mangled corpses and poor suffering wounded. Victory has no charms for men when purchased at such cost." - See who said it and why it matters at the bottom.

1 big thing: An uncertain Fed for an uncertain time

Illustration of Jerome Powell surrounded by exclamation points and question marks.

Photo illustration: Eniola Odetunde/Axios. Photo: Zach Gibson/Stringer/Getty Images

The Fed policy meeting Wednesday that was designed to further clarify its new stance on "average inflation targeting" — a topic addressed by multiple policymakers on its rate-setting committee in the month since it was announced — left the market with more questions than answers.

What's happening: The Fed announced that not only was it keeping U.S. interest rates at essentially zero for now but it plans to keep them there until at least 2023, extending its forecast an additional year.

But there were a series of contrasting messages in both the Fed's statement and in chair Jerome Powell's press conference.

Notably, the central bank raised its expectations for 2020 U.S. growth (to -3.7% from -6.5%), inflation (to 1.2% from 0.8%) and employment (to 7.6% unemployment from 9.3%) but also announced it was likely to crank up its stimulative bond-buying programs and keep interest rates lower for longer.

The state of play: Critics are growing louder about the lack of consistency and detail in the Fed's policies and criticism is even growing within the Fed, evidenced by two dissenting votes to its newly announced inflation goals.

What we're reading: "The Fed's caution and patience have led to a preference for vague statements rather than firm commitments, and that dedication to flexibility has already had a consequence," Eric Winograd, senior economist for fixed income at AllianceBernstein, said in a note to clients.

Winograd argued that Powell's refusal to define what was meant by the words "for some time" in the statement led to the decline in stocks that pushed the Nasdaq to end the day down 1.25%.

Keep it 💯: "The market was looking for explicit guidance about the parameters of the new inflation framework, but the Fed chair chose not to share details," said Seema Shah, chief strategist at Principal Global Investors.

"He also failed to discuss how they will utilize the toolkit, leaving investors in the dark about how it will push inflation to 2%, let alone overshoot it."

Between the lines: "And if inflation met the 2% mandate consistently, would that even be a good thing for U.S. households?" BlackRock chief investment officer of global fixed income Rick Rieder asks rhetorically in a note.

"For most lower- and middle-income households, inflation for inflation's sake is a drag on net disposable income and, more to the point, on quality of life."

2. Catch up quick

After President Trump tweeted that Republicans should "go for much higher numbers" when it comes to fiscal stimulus, White House Chief of Staff Mark Meadows said he is "probably more optimistic about the potential for a deal in the last 72 hours than I have been in the last 72 days." (CNBC)

Coronavirus infections rose slightly over the past week, with scattered outbreaks in every region of the country, and an increased daily rate of new cases in 17 states. (Axios)

Florida Gov. Ron DeSantis plans to terminate the state's enhanced unemployment benefits program because the state doesn't pay its unemployed workers enough to meet the 25% matching requirement. (Politico)

Global pension and sovereign wealth funds are preparing to offload about $200 billion in equities in an effort to rebalance their portfolios, posing a risk for equity markets, JPMorgan strategists say. (Bloomberg)

3. Retail sales return to trend

Data: U.S. Census Bureau; Chart: Axios Visuals

One of the few economic readings sporting a V-shaped recovery is U.S. retail sales, which showed the highest monthly gains in history in May (18.3%) and June (8.4%), and grew in August by 0.6%.

On one hand: While the reading showed a significant slowdown, total retail sales in August were higher than they were before the coronavirus pandemic hit the U.S., even when excluding food services.

Spending on electronics rose 0.8%, clothing purchases increased 2.9%, and furniture spending rose 2.1% from July.

On the other hand: There is worry that the slowing pace reflects a slowing economy and consumers pulling back spending because Congress has not passed new relief measures to help the millions of Americans who remain out of work.

"Credit- and debit-card data collected by research firm Affinity Solutions and research group Opportunity Insights showed that overall spending was down 7.3% at the end of August compared with January levels," WSJ noted.
"JPMorgan Chase & Co.'s tracker of credit- and debit-card transactions showed that spending was down 5.7% over a year ago through Sept. 12, with airlines, travel and entertainment particularly hard hit."

Of note: The retail sales report does not track spending on services like health care, legal, and leisure and hospitality, which make up the lion's share of U.S. consumers' spending.

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4. Snowflake's record IPO is one for the ages

Snowflake shares more than doubled after debuting on the New York Stock Exchange Wednesday, punctuating perhaps the most impressive opening in history.

What happened: The company initially proposed a price range of $75 to $85 a share.

But because of spectacular interest, boosted by backing from Warren Buffett's Berkshire Hathaway and Salesforce, it dramatically increased its proposed price to a range of $100 to $110 a share Monday morning, and finally priced shares at $120 Tuesday night.
The stock opened at $245, rose to a session high of $319 and finished the day at $253.93.

But ... why? Snowflake got the attention of Buffett and co. because of its unique business plan — the company produces database software that can be used in the cloud and scaled up or down as needed, with variable pricing.

It checks all the right boxes for the current tech-driven super cycle and sells a product and generates a profit, something for growth investors and value-conscious stock pickers like Buffett.
"There's not really a pure-play company on the market like Snowflake," independent technology investment analyst Beth Kindig told MarketWatch.

By the numbers: For the fiscal year ended 2019, Snowflake's revenue was $264.7 million.

On Wednesday, the company raised $3.36 billion, selling 28 million shares in the biggest software IPO of all time, per Reuters.

The moral of the story: "A stock is worth exactly what somebody wants to pay for it," CEO Frank Slootman told CNBC after the stock began trading.

"It's like talking about the weather, it is what it is. Tomorrow's another day, we'll see what it brings."

5. Foreign U.S. bond buying rises for third straight month

Data: U.S. Treasury; Table: Naema Ahmed/Axios

Foreign holdings of U.S. Treasuries grew for a third straight month in July, rising to $7.087 trillion, data from the U.S. Treasury department showed on Wednesday.

Why it matters: Continued foreign buying shows that even as yields have been stuck at historic lows and Treasury issuance has skyrocketed with massive U.S. deficits to deal with the coronavirus pandemic, foreigners continue to up their buys.

The strong buying trend has held even as China has cut back on its pace of bond buys from previous years and ceded its place as the top foreign holder of U.S. debt to Japan.

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The Fidelity Disruptive Technology Fund invests in companies using new technology to deliver cloud computing, harness big data, and transform consumer experiences via digital platforms.

Learn more about Fidelity's disruption funds.

Investing involves risk, including risk of loss.
Fidelity Brokerage Services LLC, Member NYSE, SIPC. 904283.2.0
Read additional important information..

Thanks for reading!

Quote: "I am tired of the sickening sight of the battlefield with its mangled corpses and poor suffering wounded. Victory has no charms for men when purchased at such cost."

Why it matters: On Sept. 17, 1862, the Battle of Antietam was fought in the American Civil War. It was the first on Union territory and became the bloodiest day in U.S. history, with a combined 22,717 dead, wounded, or missing.