Episode 3: How to play the U.S. CPI and Walmart and play Ford's stick against U.S retail sales

[00:00:04] As investors, we all know that we can make big profits or losses around major economic or corporate data releases. In this show, we're going to discuss which of those could move markets in a meaningful way and then address how to play them. The show is going to be in two parts. We have the before part, which is going to look at what's coming up, expectations going into that event and the different ways which results can move asset prices. And then we've got the after portion where we look back at what actually happened, how it affected prices, and then learn from that price action for future trading. You see what we're going for here? Great. This week, you might think we're going to focus on Apple's earnings results coming out. Not this week. We think there's something much more important than that to focus on. This week could see an event that could dictate asset performance for the rest of the year. On Wednesday, the FOMC, that's the Federal Open Market Committee, also known as the Fed, will make their decision on interest rates. Why is this so seismic? It's because the Fed has effectively been propping up the world economy for the last decade and keeping interest and therefore borrowing rates low. How do we get to this? No surprise it all started in 2008. Not many of us are going to forget the economy in 2008, which was having a massive heart attack. So the Fed had to do something drastic to assure basic things like banks had enough cash to cover deposits. Their solution was to set interest rates at zero to try and support the economy. But that wasn't enough. When the crisis started spiraling out of control, they entered the bond market as a buyer and for some time they were the only buyer. It's this process that's called quantitative easing, but luckily it worked. It helped stop the carnage of what was a real financial panic by showing investors that the government would always do something to save bank deposits. Over the course of the next nine years. The Fed kept printing cheap money. In fact, its balance sheet reached 4.5 trillion U.S. dollars. By doing this Central banks distorted the natural order of markets, and the world has become dependent upon a constant flow of cheap money. And it meant that the US economy picked up. So after a while, the Fed tried to get things back to normal by raising interest rates and unwinding the now inflated balance sheet. This is called quantitative tightening. It was going well until the equities market skidded in the fourth quarter of 2018. It spooked the Fed, who then decided to put the brakes on quantitative tightening and interest rate hikes. So where are we now and why is Wednesday's announcement so important? Well, Jerome Powell, who is at the helm of the US Fed, is tasked with the unenviable burden of balancing a US economy that's sending mixed signals. We have the weakest ISM manufacturing data in over 10 years, but we have an employment picture that remains firm and a US consumer that's unfazed. And that's not all. He's under political pressure from President Trump to cut rates as the US is heading into an election year. What could they announce and how could it impact the market for investors? Well, firstly, we could see no change to rates. Secondly, a 25 basis point cut. Thirdly, a 50 basis point cut. The market recently placed a 90 per cent probability that the Fed will cut the benchmark interest rate by one quarter of a percentage point. At this October meeting, the Fed has never failed to deliver when market expectations have been that high. So what happens if they deliver on the quarter point cut? Given that the market is 90 percent sure that there's quarter point cut is going to happen, it's fair to assume that it's already priced into people's expectations. Of course, it also means that were it not to happen, the reaction would be sizable. The expected 25 basis point cut means the dollar should return towards the middle of its range. Bonds should edge lower and yields edge higher. Equities, well, they're going to struggle to push on because they're already near their all time highs. But and it's an important but, The market may be more confident than the Fed, and the Fed itself hasn't been as predictable as it has been in the past. At the start of the year, the Fed was making decisions that were unanimous, but by the September meeting, the committee was split seven to three. So what would happen if the Fed failed to deliver on the quarter point rate cut that everyone expects and instead made no cut at all? Now, that would be interesting. Number one equities will sell off hard and fast. And the biggest down day of 2019, which was down 3 percent,  well, that could be eclipsed. Number two, treasuries. They'll also sell off. And remember, the US 10 year yield is within striking distance of that crucial 2 percent level. And thirdly, the dollar would probably explode to the upside, causing huge pain in emerging markets and all the commodities such as oil and copper. They'll dislike a strong U.S. currency. And then there's another twist in the tale. What if they shock the market and not only held interest rates at the same level for now, but indicate that they're actually planning to move them up in the future? Stocks would plummet and yields because there would be a fear of global economic slowdown. Luckily, this is very, very unlikely. All right. What if they went the other way and they cut by half a percentage point instead of the quarter that everyone else is expecting? Well, this really would be a shock. In fact, the market has given it a zero probability. What else should we be looking for? The Fed will also release an accompanying statement which economists will pore over for signs of life. The Fed may use this to signal that the cut they've made is the last one for a while. It'll probably be described as the completion of the mid cycle adjustment and it could be the pin that pops the equity balloon. No more cuts to come for a while is negative for equities, especially with expectations where they are. Alternatively, if the Fed sees no inflation and healthy asset prices rather than bubbles, then the equity party carries on. And talking of parties, if the Fed sees global manufacturing weakness  taking a sharp drop lower and suggests they're ready to cut interest rates a lot more in the future than the equity fears that will rage on because equities love cheap money more than they love growth. OK. A lot of scenarios here. So what's the bottom line? Right now, equity markets worldwide are a bit stretched to the upside. The risk is that people are so expectant of a quarter percentage rate cut that if it happens, there'll be an anticlimax. And stocks will drop off their highs. Having said that, remember, the Fed will always have your back. We can't forget about Apple entirely. And the reason we must focus on Apple is that large tech is having some big moves. Just last week, another tech juggernaut, Amazon, reported slightly worse results. And the stock got taken to the cleaners, down 9 percent in the aftermarket. And then it opened up another 6 percent down the next day. Why does this matter for Apple? Well, it shows that stocks, especially tech stocks, are priced to absolute perfection. Any hiccup at all could lead to some short term profit taking. So what should we be looking for? The key metric we need to focus on is iPhone shipments. The number the street wants to see is forty two point three million. A miss on shipments and the stock could pull back to the twenty three point six Fibonacci retracement level at two hundred twenty six dollars and 90 cents a share. And that wouldn't be unreasonable in short term profit taking roughly a 7 percent sell off. Well, that's kind of like Amazon. Remember, the FOMC is earlier that day and so it will be Jerome Powell and his pals in the Fed that are going to dictate the market. I'm Jamie Macdonald. Thanks for watching. Before and after. And I'll see you again on Friday