Wall Street Breakfast

Author: bmotrader   |   Latest post: Thu, 6 May 2021, 9:43 AM


Wall Street Breakfast: Fed Watching

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The Fed's monetary policy-setting committee is expected to show exactly how patient it is this afternoon, revealing its thoughts on inflation, bond buying and risks to the financial system. While the FOMC isn't expected to adjust monetary policy at the April meeting, investors will be looking for whether the officials start "thinking about thinking about" tapering the pace of $120B+ monthly asset purchases. Most economists aren't expecting that to start until the central bank's June meeting at the earliest.

Bigger picture: Even talking about easing up on the Fed's purchases of Treasurys and mortgage-backed securities will be a delicate balance. In 2013, Fed officials triggered a "taper tantrum" in the bond market - which pushed yields on the 10-year Treasury up by half a percentage point in a month - when they started to indicate a reduction in asset purchases was on the horizon. That's something current Fed officials will be careful to avoid, as the higher interest rates would threaten the economic recovery.

In its last statement, the Fed said it would continue its pace of buying at least $80B of Treasury securities per month and at least $40B per month of MBS "until substantial further progress has been made toward the Committee’s maximum employment and price stability goals." So any indication that progress has been made towards those goals may be significant and could indicate that officials would consider moving up plans to adjust policy. Investors and economists will also be listening to how Fed Chair Jerome Powell characterizes inflation (and core numbers), which can be a sign that the economy is running too hot. Until this point, he has maintained that any spike in price increases will be "transitory."


Major averages traded around the flatline on Tuesday, and similar sentiment was seen overnight. Dow and Nasdaq futures dipped 0.2%, while contracts linked to the S&P were marginally higher. Traders appear to be in wait-and-see mode before the big Fed meeting, as well as the latest slew of corporate earnings.

Quote: "Any clues offered in the board’s statement or in the subsequent press conference about potential QE tapering - when and how fast - would likely move both the stock and bond markets," Leuthold Group chief investment strategist Jim Paulsen declared. "Many FAANGs are [also] reporting this week and the stock market may wait until some of these key reports are out before deciding on its next major direction."

Others think Powell has the potential to rattle Wall Street if he sounds too hopeful. "The markets may end up reading too much into his optimism and not enough into the need for patience to see more data come through," said Morgan Stanley's Matthew Hornbach. "I'm expecting the chairman to frame it in that way. Great data, we just need a lot more of it."

American Families Plan

President Biden's "Build Back Better" agenda will be on display this evening as he addresses the nation following his first 100 days in office. At the heart of the speech is the "American Families Plan," the second stage of a multi-trillion-dollar investment proposal. The first part, called the "American Jobs Plan," was released at the end of March and would be funded by a corporate tax hike. The bill is currently working its way through Congress, though the administration is prepared to push it through without GOP support.

Meet the "American Families Plan": The proposal is being referred to as an investment in so-called human infrastructure like child care, health care and education. It would be paid for by hiking taxes on the wealthiest 1% of Americans, most notably a near doubling of the capital gains tax rate on incomes above $1M to 39.6%. The top income tax bracket for households earning more than $400,000 is also expected to return to 39.6% (where it had been before the 2017 tax cuts).

As for the details of the bill, it would include free preschool for all three- and four-year-olds, and require that all pre-kindergarten teachers earn at least $15 per hour. It would also expand the Child Tax Credit through 2025, in addition to extensions for the Earned Income Tax Credit and subsidies in the Affordable Care Act. Paid family and medical leave are among other benefits, as well as education programs that include free community college.

Tale of two tech giants

Net profits at Google parent Alphabet (GOOG, GOOGL) surged by a whopping 162% last quarter, while revenue soared 34% to a record $55.3B. Pandemic factors helped drive up earnings like coronavirus lockdowns, online shopping and YouTube watching. That led to lots of clicking on ads purchased by retailers, which have increasingly turned to digital commerce as people stopped coming through the door during COVID-19.

Movement: Alphabet gained as its board authorized the repurchase of up to $50B of stock. Shares climbed 4.2% to $2,400, or by nearly $100, following the Q1 results.

Microsoft (MSFT) is also doing tremendously well. The company reported fiscal Q3 revenue of $41.71B, up 19% on the year, as well as the company's largest quarterly revenue growth since 2018. "Over a year into the pandemic, digital adoption curves aren't slowing down. They’re accelerating, and it's just the beginning," said CEO Satya Nadella. The firm also posted strong growth in gaming and the cloud, and guided to the upside for FQ4 revenues.

Movement: The stock didn't put up the big gains seen at Alphabet. MSFT shares slipped 2.6% AH to $255, as Azure growth came in line with analyst estimates on a constant

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