Monday Takeaways: This Number Is More Important Than Earnings and Interest Rates

Shah Gilani Jan 29, 2024

Earnings are rolling in. Five of the “Magnificent Seven” tech stocks report this week.

But that’s not the biggest news I’m watching.

The Fed is meeting on Wednesday… and Jay Powell will face an audience hungry for comments on interest rates, the economy and inflation.

But that’s STILL not the No. 1 thing I’m paying attention to.

No… what I’m looking at likely won’t be addressed by Powell… but could have a huge impact on the markets and the economy. The last time this number came out… bonds rallied and markets soared.

Find out what it is in today’s video below.

 

Cheers,

Shah

Transcript

Hey everybody. Shah Gilani here with your Monday Takeaways.

I got a couple for you today and they’re going to get more interesting as I go down the list.

First up, a dustup in the Middle East. U.S. troops were attacked and I believe the three soldiers, U.S. soldiers, were killed. Something like 33 now are wounded in what was believed to be a Jordanian staging area. The Jordanians say the U.S. base was actually in Syria. Nonetheless, there are U.S. deaths and that is heating things up in the Middle East.

So far there are 10 countries in the Middle East that have engaged themselves in what’s going on in the Middle East with the October 7 attack on Israel by Hamas militants from Gaza and Israel’s invasion of Gaza. So we’ve got now other players in the mix and now there’s supposedly alleged… I hate that word, but I guess in this case it is applicable because we don’t really know.

Intelligence seems to indicate that the attacks were the [inaudible 00:01:15] and there were drone attacks, were Iran backed militias. So what is that doing? That’s stirring the pot in the Middle East and oil is rising.

Takeaway there is to keep an eye on oil as Mideast tensions seem to increase. Let’s hope that they don’t. Let’s hope that there are some talks in Paris upcoming that do see some kind of forward progress in stemming the violence than the death in the Middle East.

In the meantime, with what also happened over the weekend with the attacks by Houthis on shipping in the Red Sea, oil is finally starting to tick up.

So keep an eye on WTI. Takeaway there is WTI, West Texas Intermediate, the U.S. benchmark above 80 will start to see some resistance and gets above there. 85 is another resistance level.

And so if oil goes higher, then that’s going to put a damper on expectations for inflation to continue its downward trend. So takeaway there is watch oil this week, watch what’s happening in the Middle East and watch what’s going on with oil. Upticks in oil are going to add some volatility to the market.

Speaking of inflation, we got the Fed meeting on Wednesday and Powell’s Q&A. So the expectations as far as fed fund futures at the Friday’s close, fed fund futures had been looking for some kind of cut at this upcoming meeting. Now it’s 0% chance of a cut.

However, fed fund futures are pricing in two rate cuts by the June meeting. So that’s up there.

Really, I think the most important takeaway this week from the Fed meeting is going to be how Chairman Powell addresses the potential for cuts, how he addresses the softer market conditions and whether he addresses the fact that does the Fed need to cut? The need to cut is based on the economy slowing down. At the same time inflation is getting very close to the fed’s target. Well, it’s not close to the fed’s 2% target. It’s getting down, the trend is down, that’s great, but it’s not there. So that would be a reason to cut. It’s like, yeah, we’re getting close to mission accomplished here, but we’re not really close to that.

The other side of that is expect cuts because the economy’s slowing, the higher interest rates are working to slow the economy, which is going to dampen inflationary prospects for the future.

And then that means that if prices start to come down, if we can build in some expectations of deflation perhaps, then yes, prices will come down and that will be great. We’ll win the battle, maybe the war, but we’re not anywhere near that. The economy is still chugging along very nicely, thank you, at a north of 3% clip in the fourth quarter.

So the question, the takeaway really is what will Chairman Powell say about the strong growth versus the downtrend in inflation? Because those two don’t spell cuts, the downtrend in inflation could be temporary. Don’t forget the whole transitory thing that started this was they didn’t think inflation was going to be long-lived, but it was, and they expected transitory, inflationary pop that would eventually come right back down to earth. That didn’t happen. So now are they going to say that they think this trend is strong, that we are going to get to less than 2%, so they’ll average out at 2% and are they going to be wrong again?

They can’t afford to be wrong again. So what is the impetus for them to cut? Will Chairman Powell address this? Markets certainly want to hear some address of this. So the takeaway from this meeting is all going to be about the Q&A. It’s all going to be about not so much the statement on Wednesday, but how Chairman Powell addresses those kinds of questions which should come up. They better come up because if they don’t come up then those journalists in that room aren’t doing their job. So takeaway from the FOMC statements will be what it is, but the takeaway from the Q&A will be really important to the markets.

I want to touch just a little bit more on the Fed, a little bit more on interest rates. And this is what I alluded to when I started this call. The most important thing this week is really the QRAs, the quarterly refunding announcements, courtesy of the U.S. Treasury, courtesy usually of Janet Yellen, Treasury Secretary.

Why is QRA this week the most important thing and what will the takeaways be?

Well, it’s the most important thing, the quarterly refunding announcement. That’s when the treasury secretary announces what the quarterly needs are and how the government is going to finance its refunding needs. In other words, are they going to do X number of billions of dollars of two years, of five years, of 10 years.

So it really comes down to bills versus coupons. So are they going to be selling a lot of bills or a lot of coupons?

And the difference between bills is, bills are sold at a discount to their face value, and that’s where the yield comes from.

Coupons, you get to actually get a coupon, you get interest, and at the end you get your principal.

The difference there is important because bills are much shorter term, notes are in the middle, and bonds are longer term. So generally speaking, what happens is there’s pretty much a set around. We’ve got a little bit of everything going up.

What happened last October 30, in the QRA, Janet Yellen announced that they would be issuing more bills and fewer coupons. Now, they also announced that the refunding need for the upcoming quarterback then was going to be $76 billion less than projected. Markets love that. Bonds rallied because A, less issuance that we thought, not only less issuance than we thought because they got a little extra $76 billion, but they’re not going to be issuing as many coupons as we thought.

So if you like a 4.5% or 5% coupon and they’re not going to be issuing those anymore, you better grab what coupons that they are selling. You better rush to buy those that maybe four a quarter or 4.10 or 4% or 3.95, whatever it is, you want that coupon before the coupon rates come down. So you had a rush into these longer bonds maturities into the term premium type maturities, and that created a tremendous bond market rally, tremendous. That is what ignited the stock market on November 1. And we saw what happened in November. We had a November to remember, and then of course the follow through in December. So that’s really where it came from people, it was the QRA announcement, but we got a QRA announcement this morning on Monday, and that’s mostly shorter term stuff, but really it’s the Wednesday QRA that’s going to be important.

So the takeaway there is quarterly refunding announcements are now above the fold in terms of headline news. They’re important. They’re just as important now as what the Fed does and says. So your takeaway there is keep an eye from now on, on QRAs on quarterly refunding, that’s if you can go to the treasury.com, U.S. treasury. You can just simply Google quarterly refunding announcements and you can get to the treasury page, you can see all the news, et cetera, et cetera.

But you’re going to see the reacts, markets are going to react to what’s happening. If on Wednesday in particular, if the announcement which comes… The QRA comes before Chairman Powell speaks, before the Fed statement and Chairman Powell’s QRA. So you’ve got a one-two punch on Wednesday. Wednesday is going to be an important day. So keep an eye on QRAs.

The takeaway there is if the Treasury throws some kind of wrench in expectations, because now the expectations are, ah, interest rates are political. This is an election year and the Treasury Secretary, Janet Yellen, works for the administration.

She’s going to want to make the economy look like she wants to bring rates down. Now, the Fed is supposed to be independent of politics, but the treasury secretary certainly isn’t. And so she’s going to do what she thinks she can to help the administration, to help the election effort. And that’s going to be try and bring rates down. And the way she can do that is by what she puts in the bundle of bills, notes and bonds to be issued and how the market perceives that issuance, what they want or what they don’t want, and what that’s going to do to rates, whether it’s going to make them go higher or make them go lower.

Big deal this week, QRA, those are your takeaways for this week. Keep an eye on all that stuff, especially Wednesdays, QRA people and the Fed announcement. And maybe if there’s a really clever journalist in the room, he will address the QRA announcements with Chairman Powell. That would be a question I would ask. Hmm, think about it.

Catch you guys next week. Cheers.

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