Looking Towards a Dovish Fed Meeting
Last week was another week of up and down in the stock market that ended with the major market indices little changed. To sum it up, the market was treading water ahead of this week’s Federal Open Market Committee meeting as it digested the latest news emanating from Washington. Two weeks ago, we faced questions and uncertainty over Trump’s steel and aluminum tariffs and while those have since died down, last week brought a new round of uncertainty as the administration slapped sanctions on Russia as it also prepares tariffs and other anti-China measures and Trump claimed the US is at a trading disadvantage with Canada. At the same time, we had more departures from the administration, which could impede its ability to advance Trump’s agenda in the short-term, and special counsel Robert Mueller subpoenaing the Trump Organization as part of his investigation on Russian interference in the 2016 presidential election.
Much like it did in 2017, it’s looking like Washington will take center stage in 2018, with the only difference being the White House taking the spotlight rather than the Fed. Over the last several years, the stock market was heavily influenced by the Federal Reserve, but as we’ve seen in recent weeks Trump and his administration, inadvertently or not, have won the focus of market watchers.
The issue from an investing standpoint is one of uncertainty. From the tariffs to trade talk as well as the revolving door that is the administration, we’ve gotten a steady flow of uncertainty as of late. Here’s the thing – while the stock market is no fan of uncertainty, it appears that keeping opponents off-balance is a key part of Trump’s negotiating style, which likely means the stock market to be had in the coming months will be very different than the one we’ve seen over the last few years. Rather than the steady climb we experienced in 2017, we’re likely to face continued uncertainty as Trump looks to tick down his presidential agenda and more likely than not the stock market will remain on the edge of its seat.
Recent data should make for a dovish Fed monetary policy meeting
Offsetting the Washington news flow last week, we received several additional pieces of economic data that helped complete more of the puzzle that has been evolving the last few weeks. The result was the Atlanta Fed downgrading its GDP view for the current quarter to 1.9%. That’s down from the robust forecast of more than 5% at the start of the quarter.
Given the change we’ve witnessed in the Citibank Economic Surprise Index (CESI), these negative GDP revisions are far from surprising, and they are joined by cuts from JPMorgan (JPM) as well as Goldman Sachs (G). J.P. Morgan cut its GDP forecast from 2.5% to 2% for the current quarter, while Goldman Sachs reduced its call from 2.0% to 1.8%.
On last week’s Cocktail Investing Podcast, I talked with Lenore Hawkins, Tematica’s Chief Macro Strategist, about the importance of understanding the global macro economy and its impact on investing. As part of that conversation, Lenore shared several of the headwinds staring down the economy. Some of the GDP cuts can be attributed to rising debt levels that are constraining consumer spending, as we saw the overall disappointing February Retail Sales report.
At the other end of the spectrum, we are also starting to see the benefits associated with tax reform on business spending and an uptick in the larger economy. We saw confirmation of that in the February reports for Housing Starts and Industrial Production as well as the March readings for both the Empire Manufacturing and Philly Fed indices. Below the headline figures in those two March figures, we saw robust shipment and order activity. With a full plate of March economic data to be had in the coming weeks, should it mimic the tone of those two regional Fed indices, odds are we could see a reversal of course and some upward revisions in those recently cut GDP forecasts.
At the same time, inflation data in February has been coming in as expected and this likely leaves ample room for the Fed to offer a more dovish view exiting its next FOMC meeting, which is being held this week. At that meeting, it is widely expected that the Fed will embark on the first of its three much-telegraphed rate hikes, but it will be updated economic, inflation and monetary policy outlook from Fed Chair Powell that will capture investor attention. Given the mixed bag of economic data thus far, and the recent spat of inflation data, odds are the Fed will stick to its expected three interest rate increases forecast, although market watchers will be parsing the language for hints of a potential fourth rate hike.
Given that we are still relatively early in the year, and this is Powell’s coming out press conference as Fed Chief, odds are there will be little cage rattling to be had this week especially given the new air of uncertainty in DC when it comes to tariffs and trade. I also suspect the Fed is watching to see the impact of tax reform as well as monitor developments for Trump’s infrastructure plan.
What this likely means is Powell will offer an upbeat outlook for the economy, much the way his cheerleading predecessors have been on the topic, but mix in a “wait and see” tone for more than the already telegraphed three interest rate hikes in 2018. While this will likely lead to a sigh of relief from investors and drive the market higher in the short-term, the reality is it will only put those rate hike questions on hold for so long, especially if the economic data in 2Q 2018 picks up as we leave the winter storm filled current quarter behind. This means, much like the movie Groundhog Day, we will likely relive the rate hike question again as we get ready to exit 2Q 2018, especially if the economic data picks up as we say adios to winter.
The economic and earnings data we’re watching this week
Compared to last’s full plate of economic data, which Lenore wrote about in The Weekly Wrap, we have a relatively short list of economic data to be had this week, which likely means even more attention will be placed on the outcome of the Fed’s monetary policy meeting, which we just tackled above. Following the Fed’s rate decision on Wednesday (Mar. 21), we’ll get the first look at how the global economy fared in March courtesy of the March Flash PMI readings from IHS/Markit.
With two weeks to until the end of the current quarter, and roughly a month until 1Q 2018 earnings season gets underway, there are no companies on the Tematica Investing Select List reporting, but there are several sign post companies for those holdings that are reporting. Included among them are: FedEx (FDX), ConAgra (CAG), Darden Restaurants (DRI), Nike (NKE) and Micron (MU).
What the AT&T-Time Warner antitrust trial could mean
Outside of the coming economic and earnings reports, I’ll be watching something else in Washington this week… something that could alter the future for AT&T (T), a Connected Society company that is looking to acquire Content is King Time Warner (TWX) in a bid to adapt its business model to these blurring Tematica investment themes.
Starting today, AT&T will square off against the federal government in an anti-trust trial that could shape how you get — and how much you pay for — streaming TV and movies. The view from the Justice Department is if AT&T and Time Warner are combined, consumers will end up paying more to watch their favorite shows be it on a TV, smartphone or Tablet.
From my perspective, the bigger risk to AT&T if the justice department is successful in blocking its merger with TWX is that it becomes a “dumb pipe” .. a dumb mobile data pipe, but still a dumb pipe. Over the years, we’ve seen companies such as Comcast look to surround its triple play offering (voice, data, cable) with a protective layer of content. At the same time, we are seeing Apple (AAPL) Facebook (FB), Amazon (AMZN) and Alphabet/Google (GOOGL) join Netflix (NFLX) in developing original programming. The thought is consumers will move to platforms for content they want to watch.
Is this actually happening?
Yes, and it is a central aspect of our Content is King investment theme. All we need to look at is TV ratings be it for the NFL, Oscars or even just regular weekly programming. At the same time, new reports reveal that Amazon’s move into original video programming is paying off as it pulled in some 5 million Prime subscribers between late 2014 and early 2017. During 4Q 2017, Netflix reeled in 8.3 new million subscribers, well above the 6.3 million Wall Street expected even as it began implementing price increases. Want to stream “The Man in the High Castle” on Netflix? Can’t because it’s an Amazon property.
Plain and simple, consumers want to watch the content they want where and when they want to on the device of their choice. That’s what AT&T is hoping to tap into — leveraging the rich content library at Time Warner as it serves as the connective pipe, be it wirelessly or not.
The outcome of this antitrust trial could shape the direction of content development to come across the entire market. If AT&T prevails, we are likely to see even more M&A transactions as other companies enter the fray or shore up their content offering. If the court doesn’t let the deal go through, then we will likely see greater spending on original content development inside of Apple, Amazon, Alphabet, Facebook and others. We’re already seeing Facebook open its purse strings as it gets ready to launch a News section on its Watch tab as soon as this summer. In an effort to build more meaningful engagement across its platform, Facebook is courting publishers to create news content for its Watch tab and stating that is will “will pay publishers up front to create the content.”
The bottom line is one way or another the media landscape is changing, the only real outcome to be had of this antitrust trial is the velocity.
