Wall Street Hawk Is Found Bloodied Ahead of FOMC: Taking Stock

(Bloomberg) -- An actual hawk to be clear, and on the actual street in downtown Manhattan.

This was not an analyst pounding the table for higher rates who found himself in a fight on Tuesday that required medical attention. But for the superstitious among us looking to position the equity portfolio ahead of the FOMC minutes at 2 p.m. ET today, there is a foreboding tinge to the pseudo-viral news that was passed around late Tuesday.

Equity futures are flat to higher, following most of the worldwide indices in anticipation of the only real market moving catalyst later today. Fed Funds futures continue to price out further and further delays to any potential rate hike, with July and September expectations falling by half in February alone (well after the FOMC decision). And Fed Funds futures from Feb 1 to today have now completely removed the chances of a June hike. MKM Chief Economist Michael Darda wrote yesterday that given inflation expectations are still below the 2018 averages, and with risk spreads off the highs, the Fed is still "more likely to ease policy than continue to tighten it."

The "I-Word"

The doldrums in major news flow, while the market lies in wait for further direction (though its been a more gradual "melt-up" since late January), may only serve to amp up the reaction to the few catalysts we have on the calendar, and they have the potential to be some doozies -- especially today.

Ahead of the FOMC minutes, the "I-word" is back --yup, the dreaded inversion. Strategists like BMO’s Jon Hill recently discussed the prospects that the 2-10 year treasury yield spread may continue to narrow after a brief reprieve in late December. He wrote that the "groundwork" for the inversion could be established should the minutes suggest the FOMC is inclined to raise without economic improvement and/or recessionary risks are on the rise.

Taking that fixed income component, in conjunction with the SPX up against overbought levels (the RSI crossed over 70 Tuesday afternoon for the first time since August), the Fed should have its hands full satisfying market participants’ hopes and dreams. And perhaps in a bad omen for the rates normalization crowd, that hawk that was found injured and bloodied on Wall Street may be a sign the doves are a force to be reckoned with.

That bump up against 70 is increasingly being ascribed to “FOMO,” or "panic buying." With gains now outpacing 11% year-to-date, its hard to argue with the opportunity cost of not being involved in the SPX. Nomura macro strategists last week discussed the risk, however, that markets would be “forced to correct excessively dovish expectations” when it comes face to face with the minutes later today.

The Consumers Are Alright

We saw a little bit of the Fed anticipation trickle into the picture Tuesday, which may reverse if the above is true. Treasuries rallied while the dollar index had its worst day since January. It’s possible some of the action came as investors tried to get ahead of the minutes that may continue to demonstrate a dovish tilt while also likely discussing a balance sheet strategy shift.

The effect was nearly all equity sectors in the green, as lower yields and a weaker dollar gave a lift to multi-nationals, yield-sensitives and commodity-exposed stocks, including gold names that tend to rise with a risk-off environment. Walmart did the rest of the heavy lifting, assuaging consumer concerns, while demonstrating that it is moving "from profitless to profitable growth," Morgan Stanley analysts wrote.

Black Currency

The dollar coming off from recent highs couldn’t come at a better time for the smattering of oil players that dominate the few corporate earnings of note this week. The industry is suffering, but at worst, it provides management teams an opportunity to deflect any weaker- than-expected results with optimism for oil prices (WTI sits at levels not seen since November and has risen for 5 straight days through Tuesday, helped by USD weakness and supply disruptions in Venezuela, Nigeria). The dollar’s climb hadn’t helped since January, and had made it to the front of market consciousness, with some European investors telling Citi equity strategists that they were beginning to become skeptical that the greenback could continue its climb.

Post-market, CXO missed (while lowering CAPEX), while Devon Energy cited their U.S. oil business as attaining the “highest margins and returns in the company’s portfolio.” Its capital program is also funded at $46 WTI. Also likely helping shares in the latter was the boosted dividend, buyback program and its intent to divest non-core assets. A few more E&Ps and servicers exposed to oil prices are due to report post-market, like QEP, XEC, SRCI, FTI, NE.

Sectors in Focus Today

• E-signature and security firms (like DOCU, DBX (which owns an e-signature co.)) after OneSpan’s results; DBX reports results Thursday
• Housing exposed names as furniture, home decor names LZB and HVT both beat expectations to rise more than 4% post market
• Owens & Minor whiffed on results, watch health care supply chain names (DPLO, PDCO) while CVS’s 2019 views also missed expectations (shares are plunging 6% as I write)
• Design software names (ANSS, SNPS, PTC) after Cadence Design beats expectations, and traded up close to 9% post-market
• Satellite players in Europe like SES, Eutelsat after Intelsat’s results fell short of estimates
• Airlines after Southwest cut its 1Q RASM forecast (watch JBLU, AAL, DAL, ALK)

Notes from the Sell Side

Brokerage Charles Schwab was cut to sell at UBS and is looking to open lower by more than 3% Wednesday, as analysts led by Brennan Hawken cite headwinds from yield-sensitive clients, limited upside for rates and rising regulatory pressure. The analysts expect multiple compression in light of the rising costs. Expectations on the Street are too high, they write, and assign a Street low price target of $42 (down from $48). Peer E*trade was also downgraded (to neutral), as Hawken ponders the type of catalysts that would elevate shares much higher as the chances of a strategic transaction are "low."

Southwest Airlines was hit from both sides this morning after it was downgraded at Goldman Sachs and cut its own forecasts for first quarter RASM. Shares are now down nearly 5% pre-market. Goldman analyst Catherine O’Brien wrote that the airline’s attempts to provide service to Hawaii may have the effect of pressuring margins while the rest of the industry is growing margins. Therefore, she wrote, its premium multiple that was enjoyed over the major players will come down despite the fact that its "one of the highest quality" companies in her coverage.

Tick-by-Tick Guide to Today’s Actionable Events

• Barclays Industrial Select conference
• CAGNY conference
• AEE investor meeting
• 7:00am -- MBA mortgage applications
• 8:00am -- SO, BHC earnings call; K at CAGNY conference; BA at Barclays Industrial Select conference; KSU at Citi Global Industrials conference
• 8:30am -- CVS earnings call
• 9:00am -- MO at CAGNY conference
• 9:10am -- DAL at Barclays Industrial Select conference
• 11:00am -- HSY at CAGNY conference
• 11:30am -- UTX at Barclays Industrial Select conference
• 1:00pm -- PEP at CAGNY conference
• 1:15pm -- CAT at Barclays Industrial Select conference
• 1:30pm -- Fed’s Bullard at monetary policy forum in NY
• 2:00pm -- FOMC Minutes
• 2:00pm -- PM at CAGNY conference
• 3:00pm -- STZ at CAGNY conference
• 4:00pm -- MKC at CAGNY conference
• 4:05pm -- Recent IPO CBLK earnings
• 4:15pm -- CAR, CYH earnings

--With assistance from Elena Popina.

To contact the reporter on this story: Brad Olesen in New York at bolesen3@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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