Leveling the Playing Field November 2, 2015

Size: px

Start display at page:

Download "Leveling the Playing Field November 2, 2015"

Evan Riley
6 years ago
Views:

1 Leveling the Playing Field November 2, 2015 Life s but a walking shadow, a poor player That struts and frets his hour upon the stage And then is heard no more. It is a tale Told by an idiot, full of sound and fury, Signifying nothing. - Shakespeare s Macbeth The big headliner from last week was the FOMC meeting, which we covered on Wednesday night s newsletter. I won t rehash that discussion, but suffice it to say that Yellen et al sent some pretty unique signals that a hike could be coming in December. But is Yellen seriously considering a hike? Or is this just the FOMC version of Trick O Treat? (Sorry, had to squeeze at least one reference in). The FOMC has been talking about a rate hike for over 18 months at this point, and it s starting to feel like maybe they won t actually hike. Ever. Perhaps the Fed is really just full of sound and fury, signifying nothing? (Editor s note - I wish I could say I know that line from my literary studies. The truth is that I learned that phrase, like so many other important life lessons, from an ESPN anchor during my formative years. Sorry, I am a walking advertisement against the virtue of public schools.) The Fed has pounded us over the head with the phrase data-dependent, so we looked at some important economic data points over the last 6-12 months to see if the Fed could justify a hike at this point.

2 ISM Manufacturing 12 month history Non-Farm Payrolls 12 month history

3 Durable Goods 12 month history Core PCE (Fed s preferred inflation measure) 6 month history

4 GDP 12 month history New Home Sales 12 month history

5 Which one of those graphs screams hike rates!? They don t, which makes us wonder what the Fed is actually doing behind closed doors. That raises an interesting question: What if Yellen just wants to give the appearance of a hike without actually hiking? We ve often remarked that Fed-speak has nearly the same impact as an actual move, so maybe Yellen is slow playing a hike and using her soap box to manipulate markets without actually changing Fed Funds. Numerous central banks since 2008 have tried to hike, only to have to cut rates again. Yellen is a dove and is going to err on the side of caution. Look how much expectations for a rate hike in December had backslid over the second half of this year. Six months ago, the market was pricing in a probability of a hike in December at 76.9%. Immediately prior to Wednesday s FOMC meeting, that number was just above 30%. Maybe Yellen was frustrated by this retracement and decided to tweak the language to specifically reference the December meeting, knowing it would get a reaction. The result? The probability of a hike jumped to 50% immediately after the FOMC statement. That is basically where expectations were from April through the September FOMC meeting (that surprisingly dovish statement). Think about that for a moment. After expectations for a hike dropped, Yellen was able to completely reverse course and snap the market back into line by simply injecting one phrase into the FOMC statement. A phrase that didn t actually commit the Fed to anything!

6 Looking back at this year s newsletters, we have been expecting a hike most of the year, but that belief was always based on Fed-speak and not the health of the underlying economy. In fact, one of our key beliefs that a hike was coming was the old mantra Don t fight the Fed. If the Fed says they are going to hike, don t fight it. Right? But if the Fed isn t actually hiking, can a belief in a neutral Fed even be considered fighting the Fed? Bill Parcels was no Shakespeare, but he liked to say you are what your record says you are. If the Fed isn t hiking, maybe it s time to concede it really is a neutral Fed regardless of rhetoric? If we look at it that way, then paradoxically fighting the Fed would be a belief they are close to hiking. They ve been close for so long that we are forced to wonder if they ever actually intended to hike. Maybe Yellen just wants to keep the market on its toes enough that a hike is in the cards but she really doesn t plan on hiking. Kocherlakota came out two weeks ago discussing negative interest rates. Was than an accident? We ve been openly speculating on additional QE for a few months now, expecting the latest version of Operation Twist. But maybe the hike isn t coming and it will just be QE. Take a look at overnight rates for several nations. Sweden and Switzerland are already experimenting with negative interest rates and the Eurozone and Japan are flirting with it. Can we be far behind?

7 Having openly referenced the upcoming December meeting is so blatant that it can t be ignored. A couple of really strong job reports, starting with this Friday, could actually put December into play. But we can t help but think the baseline is not a hike, but simply more grandstanding. Markets can t eliminate the possibility of a hike in December, so rates pushed up across the curve on Thursday and Friday. Despite numerous reasons for long term rates to stay low or even fall, traders have no choice but to respond to Yellen s statement and avoid picking up pennies in front of a steam roller. Thus, rates popped up and the 10T closed the week at 2.14%. As noted in our newsletter last week, a key technical resistance level on the 10T is 2.15%-ish, so no surprise the sell-off ran out of steam there. All eyes will be on Friday s job reports. A negative number could force the market to acknowledge a hike isn t really coming in December. And a strong report could render the topic of this newsletter worthless. Keep in mind the Fed has expended considerable energy lowering the bar for a successful report to 100k+ per month and not something more like 200k. Then again, that could just be more of the same about manipulating the market s reaction. It s tough to completely back out expectations for a hike if the bar has been lowered to just 100k jobs gained, isn t it? It is a tale Told by an idiot, full of sound and fury, Signifying nothing. Revisiting this newsletter s opening, I can t help but wonder if the idiot telling the tale is actually...me. I have been talking about a hike for 18 months believing it would come in the summer and then in October and now December but maybe it s really the spring of Maybe I m the one that is full of sound and fury, signifying nothing? Maybe I ve been doing Yellen s dirty work for her? Maybe I don t want to talk about it anymore, so stop asking! Fortunately, ignorance is bliss. And while I might be an idiot, I m still cooler than the other side of the pillow.

8 Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express written permission of Pensford Financial Group, LLC.

Job: Identity Crisis Job 3

Job: Identity Crisis Job 3 Job: In Our Previous Episodes 1. God is on trial Job: In Our Previous Episodes 1. God is on trial Job: In Our Previous Episodes 1. God s character is not sufficient for human