The status quo is certainly comfortable, as long as the market continues to rise. No one actually wants to be bearish and we all generally want prosperity. Yet there is the notation of a hidden hand of Fed interventionism at work. All is good as long as that hidden hand can continue to buoy the equity markets and keep rates low, but when happens when the hidden hand of interventionism ends?
The Fed’s next FOMC meeting is September 16-17th, they will also have another meeting right before the mid-term election on October 28-29th. I suspect that the forth coming meeting will be the status quo, with no changes to rates or the current QE taper policy. They certainly don’t want to rock the boat if the market continues to climb higher. Any wild cards will be played on the October meeting right before the election.’
Courtesy of “lack of questioning“
While the recent Labor Report was fairly bad, as far as job creation, the highly touted unemployment (U3) number dropping to 6.1% is what will generate headlines that drive voters to the booth. I suspect, with one more meeting, we could see it drop to 6% and I will go out on a limb and say it will break below and we might even get a 5.9% print. Of course it will be met with a continuing drop in the “participation rate”.
The 2nd GDP estimate remained strong (4%) and the core part of that strength came from the 1.66 points added from inventory loading after companies had delayed ramping up inventories from a weak 4th quarter, followed by a weak 1st quarter. Remove the abnormal inventory gains and the GDP is back in line at 2.34%. Of course there should be some growth in inventories, but if recent historical averages are any indication, it would be about .4 points, not 1.66 points of GDP.
I had also pointed out that the shipping of capital goods in the Durable Goods orders improved and that would also help boost the GDP. However, if we remember the massive upside Durable Goods orders came from a whopper of a sale from Boeing. Remove transportation (mainly Boeing) and the core of Durable Goods orders actually contracted by .8%.
Again, it’s all about optics and if the hidden hand of Fed intervention keeps the ships sailing smoothly, then don’t rock the boat. We maybe off course, but the boat is sailing and everything “seems” fine. We are also heading into a very important mid-term election and the economy remains a key element that will impact voter decisions.
What to expect?
First, the upcoming FOMC meeting this month will be more words and no action. They may change some tone to their statement, but don’t expect any actual policy changes. Remember this is all about window dressing, while keeping the current uber-accommodative policy in place.
Second, the 2nd quarter GDP third estimate will remain strong, even if it comes in below 4%. I don’t suspect any huge downward changes because of the strong inventory loading and also the shipping of capital goods, thanks to Boeing. However, minus these two factors, there was some weakness that could bring the final revision down to 3.6.
Third, Labor Report may continue to remain mix with weak job creation, however the headline U3 unemployment rate (the “official” rate), will continue to come down. As I previously mentioned I think we could break that 6% level and see a 5.9% print in the last report before the mid-term election.
Fourth, the “official” rate of inflation, the CPI, will continue to weaken with the recent strength in the dollar after the ECB lowered their rates to almost zero and started their own bond buying QE type program. The Fed will bring their guns to bear to fight the rise in the dollar which will have an impact on the trade deficit, but they will hold off until AFTER the mid-term election as to not rock the boat.
Please, no volatility!
The goal right now is to get to the mid-term election without any huge volatility. That means for the Fed to keep the status quo with any monetary policy and any tone changes to the FOMC statement must include some optimism and talk of improvement, while also remaining cautious and concerned enough to keep the current monetary policy in place. On the political side of the equation, any legislation of worth is off the table. The Democrats don’t want to head into the mid-terms with any big legislation battles they can’t win. Additionally the President will remain vague on any engagement with ISIS , unless the populist stance changes on sending troops, but I doubt it will.
A Republic, which is decided by democracy, is an interesting animal because any major legislation or military action must win over the hearts and minds of the voter, or one will quickly find them out of office. In an election year, no politician, regardless of political persuasion, wants to risk forwarding any significant legislation and certainly not military action in case it falls unfavorably on the voters. You could say the time before any election is remaining status quo and try to woe the populace with words and not actions.
With the economy being foremost on the voters’ minds, the Fed plays a crucial role and thus will maintain a quiet stance for now.
Courtesy of Rock the Vote
There are some variables beyond the reach of the hidden hand; Russia, ISIS, China, and other international volatility that doesn’t read from the U.S. playbook. In fact some nefarious acts could be timed in unison with our elections just to toss in the odd monkey wrench. However, we are facing already huge volatility in Europe and the Middle East and it has not rocked out boat yet, our markets remain resilient thanks mostly to the current Fed monetary policy of zero rates and their willingness to print money to fund government debt.
Support & Resistance
We have been holding well above 17,000 and if the FOMC and third revision to the GDP are optimistic, we could see this turn into a support level as we rally higher.
For now the 4050 zone is a consolidation area and looking to build a base as a possible support. Apple’s new release could inject some volatility to this index, so be ready.
Much like the Dow Jones we are in a consolidation area that is slowly becoming a support area. A strong third estimate to the 2nd quarter GDP along with the status quo Fed could send this higher. The VIX remains in the 12 range, but a move higher will send the VIX lower. If the VIX is any measure, it has not fully bought into the rally from here just yet. I think the market is still pricing in some uncertainty if we will get another leg-up in this rally from here.
For me it all comes down to the Russell for measuring the general market order flow and sustainable strength in the over-all market. We must remember that indices can be driven by over-weight stocks, strong sectors, or even sector rotation. However, it is important that we look at the market in its entirety. Looking at the INDU and not looking at the S&P 500 or Russell, can be misleading. I fall back on the broader Russell to measure general order flow. While the RUT has rallied, it is still short of the 1200 mark and doesn’t seem as strong as the other indices. That can change, but for now I would look at the 1165 as short-term support and we need to see this index breach the 1190 level to confirm a strong rally will continue in the Dow Jones and S&P 500.
Keeping the status quo!
No one likes change. Remember when QE policy first came online, the world was critical of it, the market uncertain, it didn’t sit well with the majority of economists, and it was only expected to be a very short-term EMERGENCY measure to keep the economy from collapsing. Then it grew on us, we became use to it, it became the norm. The government began to rely on it and so did the market.
The tone that was once critical by the world, economist, and even market participants has changed and we have collectively become addicted to the policy for cheap money.
Yellen is new in her role as Chairperson of the Federal Reserve. I would argue that the Chair of the Fed is as powerful, perhaps even more so than the President of the United States. The Chair doesn’t have to appease the people or even Congress, it doesn’t NEED a majority vote. It sets monetary policy on the world’s reserve currency. It has the power to lend TRILLIONS of dollars and create TRILLIONS more. Yellen will still be in office when Obama leaves, much like previous Fed chairs before here – she will outlast the Presidency.
Now, more than ever, the Fed is the power of this nation in that we have all become accustomed or perhaps addicted to the Fed monetary policy. They once were in the background adjusting interest rates slowly, now they are front and center printing trillions, buying treasury bonds, buying mortgage back securities, setting interest rates at zero, and even considering MORE radical actions.
There is also the political ideology of the Fed to consider. While they have no legislation power or fiscal power, that too could change. Much like Democrats vs. Republicans that play the two-party role in our politics, the Fed has a similar two-party ideology. U.S. economics is predominately Keynesian in nature, even among Republicans and Democrats. Yet within the Keynesian group, there was a divided between Hawks and Doves. For the most part, they have all been moderate with only a couple of outliers. From 1979 to 2014, under the guidance of Volcker, Greenspan, and Bernanke – they have remained even keel and shared in a board of governors that also remained moderate.
Everything changed during the crisis, Bernanke moved to emergency measures of QE and zero interest rates. He grew wary as did other governors, many of the moderates left and Bernanke wanted to leave under a legacy of “winding down” his radical emergency program.
President Obama has been stacking the vacant seats at the Fed with more ideological dovish Keynesian members. Yellen, who probably would never have become the Fed Chair under any other President, was the perfect fit to follow a more accommodative Fed who has also dabbled in fiscal policy theory.
QE and zero interest rate policies have been with us for years now. Bernanke exited with an idea that it was no longer needed and to wind it down. However, I think we will never see it fully wind down or end as Bernanke had hoped. While QE may end, it will end in name only, the wielding of such awesome power to print trillions and to buy a variety of financial instruments that can set the course of the economy is too hard to give up. Going back to ONLY setting interest rates will seem like handcuffing and limiting their power, as QE has become the norm and not the exception to the rule, as it was introduced.
So for now we remain status quo.