Semantics

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At 2pm Eastern Time, the Fed will release their FOMC statement with any changes to monetary policy (raise rates or not). The expectations at this point is that the Fed will NOT raise rates, so if they are not going to raise rates and/or make any changes to monetary policy, then what should we expect? Well it all comes down to word smiting, message crafting, and semantics.


Semantics

A few weeks ago I wrote an article about Message Crafting and since then nothing has really changed. When we get down to the bare bones, the facts, the actual action of the Fed – absolutely NOTHING has changed. Sure they told us that QE ended, but it didn’t really as they are still buying bonds and assets, which at the core is what QE is all about. Some would argue they are not printing new money to buy these assets, but rather using maturing bonds to reinvest them – but that is getting into the semantics argument. The reality on the ground is the Fed remains the largest buyer and holder of bonds, who really cares where the money comes from at this point.

Yellen has also fumbled the ball as her personal message crafting frankly blows. She can’t hold her tongue and has (more than once) actually contradicted her very own FOMC policy statement. She has said they are going to raise rates, but then doesn’t. Says the Labor market is looking strong, then says it has structural problems. Says the economy is on track and raising expectations on GDP, then says she is concerned about domestic growth. The more she speaks the more she sounds like she really doesn’t have any ideas.


courtesy of wikipedia

She also hasn’t been able to keep the reigns on her own governors. Historically the Federal Reserve Presidents have been far more outspoken, but the Fed Presidents run the regional banks and are not part of the inner-circle of U.S. President appointed governors. To have a governor to speak out in a way that may contradict the Chairman is unusual. Under Greenspan and Bernanke, the reigns were very tight among governors – who spoke with ONE voice and it was only the occasional Fed President that would have something to save with a little more color. However, I believe this is more of a management problem as governors are just taking a page from Yellen’s outspoken playbook. The current five governors (2 seats remain open waiting for Senate confirmation) are all appointed by President Obama and are all ideological staunch Keynesian economists from the theoretical academic world where utopian central planning is a dream. Reading some of their academic papers, prior to becoming Fed governors reads Animal Farmesque than real world practicality.


Horn and Hoof Flag – courtesy of wikipedia


Data Dependent?

If we believe the Fed is actually data dependent, as we have been told (repeatedly), then the data is telling us they will NOT raise rates.

Economic Data (two primary data points that follow the Fed’s dual mandate):

Labor Report: 142,000 vs. 206,000 expectations = very weak
CPI/PCE/PPI (inflation indicators): all showing disinflation


Additional Economic Data this week:

PMI: fell to 54.4, expectations were a rise to 55.5


source: tradingeconomics.com


Durable Goods: fell 1.2% for September and August was revised down 3% far below expectations


source: tradingeconomics.com

Across the board the domestic economic data is weak, in fact it stinks. Stories are starting to emerge in the financial media about concern of the possibility of another recession. This plays out from the recent earnings seeing top-line revenue weaker and lower forecasts.

I think it is clear, if the Fed is data dependent, they will NOT be raising rates. Economic data is weak across the board and earnings showing weaker top-line domestic revenue.


Semantics

So the FOMC statement today will be only about how the economic and Fed wonks will read into it. There will be NOTHING new in there. It will say they continue to remain positive about economic growth, but also are concerned about economic growth. It will restate they continue to buy bonds and mortgage back securities, confirming that QE never really ended – but in name only. It will be another example of pseudo-economic semantics and what is far more absurd is that some economic wonks will read into it as if it says something it doesn’t, but I guess they need to validate their jobs. Can you imagine an economic reporter saying – “Fed saying nothing of substance and rates remain unchanged, rinse and repeat!”.

The question is not whether the Fed will raise rates or whether there will be anything substantive in their FOMC statement, the real question is how will the market react? How long can the market rally on the “bad news is good news” mantra that means the Fed will keep rates at zero? At some point does bad news mean bad news? How long can the Fed kick this ZIRP can down the road?


Radical Measures?

Of course they have a few more radical tools they have yet to pull out and even suggesting them will have some calling me some fringe nutter. Of course, when I said the Fed would buy U.S. bonds I was called a nut, but here we are years later and trillions of bonds bought and everyone has accepted it as being normal. So what else could the Fed do? How about taking rates negative? What about ramping up QE4? What about buying financial futures (S&P)?

Yeah, that all sounds crazy – but guess what, all those things have already happened in Japan and Europe. They have and are now planning to increase their own QE, print more money, Japan has supported (bought) their own stock market, and even taken rates negative. Don’t think it can’t happen here, because everything we thought couldn’t happen to this point has. Never say never and remember it may be improbable, but certainly not impossible.

I personally don’t see how the Fed can raise rates, beyond the weak domestic data. The dollar strength and disinflation pressure alone is a good reason NOT to raise rates if deflation is a concern.


Market Reaction?

So while the media hypes the FOMC meeting today and the economic wonks try to read into it, the market will move on perception.

No rate hikes and a tone that no rate hikes will happen this year = market rally.

Rate hike or the tone the rate hike will happen this year = market sell off.

But at some point the weak fundamental data will over-ride any Fed policy. Of course the Fed could move forward with a more radical monetary policy as I have suggested. Yet this would only kick the can down the road and buy more time.

The market has rallied back based on the perception of NO rate hike. Can it continue to rally?


Support & Resistance

INDU 17,600
This is certainly a straddle strike and I suspect it will move radically higher or lower as it absorbs the FOMC statement. Resistance 17,800 and support 17,200.

NDX 4,650
The tech heavy index is pushing up against resistance and Apple’s earnings were good, but not a blow-out to drive it radically higher. Look for some resistance.

SPX 2070
We can and most likely will jerk above 2080 and below 2060 today and see some volatility. The FOMC statement will take some time to absorb. I would look at 2100 as resistance with 2040 as support.

RUT 1140 – 1160
The Russell has not rallied like the other indices. The broadest market measure of order flow is lagging and we saw it weaken yesterday after it looked like it could break-out. Today’s FOMC statement can send this index solidly above 1160 and towards 1180. A close this week above 1180 could mean we are heading for a holiday Fed rally. On the other hand, a close below 1140 be the end of the week means we could be heading back to 1120 or 1100 as real fundamental concerns are starting to drown Fed’s easy money.


We are getting to the end game where the Fed has to take more radical measures to keep asset inflation and the economy moving on a growth trajectory. The economy is not strong enough to stand on its own and show solid growth without Fed interventionism. It is not that I support the Fed’s policy, I am just trying to be objective.

If economic data continues to weaken, what can the Fed do as we are already sitting at zero rates and the Fed is already buying bonds and mortgage back securities. I offered what some may consider radical monetary policy measures, but what else is there to do – if we want to keep this going?

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