Will Jerome Powell Play Santa Claus? Plus FDX Earnings

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Wednesday, December 19, 2018

‘Tis the season… for ordering gifts online and having them delivered before Christmas. Which makes yesterday afternoon’s fiscal Q1 2019 earnings report from global logistics company FedEx FDX particularly fitting. That said, shares of FedEx are down 8% in today’s pre-market following a mixed report overall, capped notably by slower growth outlook for its new fiscal year.

Yes, FedEx has lowered its 2019 guidance, citing weakness in the Eurozone ongoing and a global trade declines overall. But in the past three months, the delivery giant outperformed on the top line to $17.8 billion from $17.7 billion in revenues expected. Earnings of $4.03 per share missed the Zacks consensus by 2 cents, but grew more than 26% year over year. For more on FDX’s earnings, click here.

What has investors eyes all aglow today is the press conference from Fed Chair Jerome Powell following the latest FOMC meeting, which began yesterday. Just about all year, analysts had been expecting a quarter-point interest hike at this December meeting. Odds are still very good that rate hike is coming, bringing the nominal rate to 2.25-2.50% – the highest since prior to the economic collapse leading to the Great Recession a decade ago.

Increased interest rate tightening has helped generate more volatility in the stock market than we had grown accustomed to over the past several years, along with other big unknowns such as the overall affects of the U.S. trade war with China. Today’s move would constitute the fourth rate hike in calendar 2018, meaning we will have brought interest rates up a full percentage point from a year ago – back when corporate tax cuts were being slashed in order to help heat up the economy.

Powell himself has found himself in the unique position of having a profound effect on stock market trading. When he said in early October that “the U.S. is not on a sustainable fiscal path,” indexes slid drastically, generating a bearish mood among investors that has mostly remained in the 11 weeks since. Yet late last month, when he claimed that the benchmark interest rate was “just below” neutral, this led market participants to buy back into stocks on the idea that the Fed may be close to finished raising interest rates.

Gaming what Powell says/means has become a cottage industry of sorts, especially considering how much money can be made (or lost) in the direct aftermath of his public statements. The Fed Chair has by now been around the block, so may now have a handle on how to present language related to future interest rate decisions. As we are deep into holiday season, will he be in the mood to play Santa Claus?

In order to do so, Powell would likely need to stop using phrases such as “further gradual increases” in his statements beginning today, especially if rates rise 25 basis points again as expected (if the Fed decides to hold steady and not raise at all, this might put everyone in a buying mood). If he presents wordage that alludes to perhaps zero rate hikes in 2019 – keeping “data dependent,” of course – this could unlock holiday (and animal) spirits on equities buying today and tomorrow, as well.

Basically, no one is going to go broke with a 2.5% Fed funds rate. Thus, whether or not traders want to stay petulant after 2pm today when Powell’s address begins, it’s not necessarily indicative of anything bearish on the economic horizon. Much of the decision-making still will be reliant on how the trade war moves along, and we won’t know that until probably the second month of the new year, if then.

So near-term, if the Fed decides to ratchet up rates today, suggesting March 2019 is off the table ought to go a long way toward investors feeling better about their near-term future. Is that the same as playing Santa Claus? No, but at least it’s not Krampus.

Mark Vickery

Senior Editor

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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