U.S. equities cut their gains into the close on Wednesday after initially trading higher earlier in the session.
Investors were spooked by a warning from the Federal Reserve, in its latest meeting minutes, that tighter monetary policy than is justified by economic conditions is coming. Why? Because financial conditions — higher stock prices, lower bond yields, easy credit terms — are too lax, in their opinion. This was a strong message that the start of balance sheet normalization or “quantitative tightening” is likely to start in September.
Also weighing on sentiment was the disbanding of President Donald Trump’s business advisory councils after a stream of CEOs quit in the aftermath of the Charlottesville protests. In the wake of the recent announcement of a possible tightening of trade terms with China, it looks like Trump’s relationship with big business is souring a little.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite gained 0.2% and the Russell 2000 gained a fraction. Treasury bonds were stronger, the dollar reversed early strength to finish lower, gold gained 0.3%, and oil fell 1.6% to extend its recent weakness. Edge subscribers benefited with a 3.4% gain in their ProShares UltraShort Crude Oil (NYSEARCA:SCO) position.
Click to Enlarge Breadth was mildly positive, with advancers outpacing decliners 1.5 to 1 with NYSE volume at 89.6% of its 30-day average. Materials led the way with a 0.9% gain while energy was the laggard, down 1.1%, as the sector appears to be on the verge of an epic breakdown out of a two-year trading range.
Target Corporation (NYSE:TGT) gained 3.6% in a rare batch of good news for the retail sector after reporting better-than-expected earnings driven by same-store sales growth of 1.3%. Digital sales were up 32% from the year prior, an area of focus for the company.
Conclusion
The Fed was the center of focus today amid recent softness in the inflation data and chatter from Fed officials that there are internal disagreement on inflation expectations.
While the minutes of the Fed’s July meeting were, on the surface, seen as dovish given the focus on the recent decline in inflation pressure and retail sales softness, the details were decidedly less so. Policymakers warned of “elevated vulnerabilities” to financial stability from high asset prices and said monetary policy would run tighter “than otherwise was warranted” to address this risk.
So, while acknowledging that inflation risks were tilted to the downside, and with many officials wanting to see inflation bounce back before hiking rates again, others were ready to pull the trigger on balance sheet normalization in July.
The takeaway: A growing cohort at the Fed is frustrated that financial conditions have continued to ease since rate hikes began in 2015. Higher stock prices are a symptom of this. And until the markets gets spooked, these policy hawks are likely to keep the pressure on.
And as for Trump’s latest political blowback it is seen as lessening his political capital heading into a fight over tax reform and the debt ceiling. The post-election enthusiasm over pro-growth policies and a pro-business White House seem to be fading now.
Check out Serge Berger’s Trade of the Day for Aug. 17.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
