2017/03/15 Quick Take: 'Fecstasy’ or ‘Fedache’?
© 2017 ROHR International, Inc. All International rights reserved.
Extended Trend Assessments reserved for Gold and Platinum Subscribers
Quick Take: Wednesday, March 15, 2017
‘Fecstasy’ or ‘Fedache’?
So what will it be? Janet Yellen providing exact ‘on target’ encouragement for the economic outlook, and with it the US equities psychology. Or even if she tries to sound a bit circumspect on previously signaled further 2017 base rate increases , will the very likely FOMC rate hike this afternoon lead to visions of further hikes that will worry the markets? The ‘received wisdom’ is that the US equities have discounted the heavily foreshadowed next federal funds increase today. Yet it is always important to see what happens in the event to understand how the markets really feel.
It is of course that much more important on this likely rate increase. That is due to it being a combined FOMC economic and interest rate projections revisions (14:00 EDT) meeting. That is followed by Chair Yellen’s press conference (14:30 EDT), which leaves plenty of room for anticipation. The recent strength in economic data seems to reinforce the case for a 25 basis point hike today from December’s first increase in a year to 0.50-0.75%.
Yet that is still well below the annualized US Core Inflation the Fed watches most closely, which is nearing its 2.00% target. The continued US economic growth has been reinforced by this morning’s coincidentally timely US CPI release and especially upward revisions to January’s US Retail Sales figures. The slippage in the February reading for the latter was well anticipated due to the late delivery of tax refunds from the Treasury Department.
As such, the question becomes whether the anticipation will be for the total of three 2017 rate hikes (i.e. two more this year) inferred from the December projections revisions and press conference, or it is possible there will be a total of four hikes? That’s an important question for US equities that have been under pressure of late after their stellar rally into a new all-time high right after Mr. Trump’s Tuesday, March 1st address to Congress.
However, it is clear that it has not been any ‘fear of Fed’ on this very likely incremental hike today that has been the real problem for equities since then. That is more so on the disappointment with the potential for Trump’s reform agenda to be implemented timely after the impasse over the House healthcare reforms plan. As noted repeatedly, those are an essential precursor to the more important tax reform effort. Therefore, equities may not restore their previous bullish tone even if Fed Chair Yellen is totally ‘angelic’ in her further communication today. And we suspect she can be just that for a very good reason…
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.
NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by a Trump administration that will likely be approved by the heavily Republican Congress now diminish the similar fears we had to what transpired in 2007-2008.
▪ …which is that very same stall on the Trump reform agenda. While the economic data has improved of late, the overall US growth momentum remains a bit lackluster. It is edging up from the very weak multi-year US GDP growth below 2.00%. However, the expectation it can gallop up to 3.00% or higher levels anytime soon is tied into the Trump reform agenda success. And as that is what is under the cloud of the stalled healthcare reform at present, there is not yet any reason to believe the stronger growth that can very likely bring higher inflation is imminent.
While it might seem a bit perverse, the US healthcare reform impasse is of huge benefit to the Fed and Chair Yellen right now. That is because lacking a definitive dynamic for future US economic growth which is contingent on the extent of tax reform, the Fed can remain more circumspect without appearing to be behind the curve on any inflation anticipation.
Data Dependent
Therefore, we can likely expect Chair Yellen to succeed in threading the needle on very constructive views of the US economy. Yet that will most likely be without needing to assert there will definitely be the sort of very strong growth that would require another three 25 basis rate hikes after today’s likely federal funds bump. The current healthcare reform impasse and the attendant tax reform delay allows the Fed to maintain its long held favorite stance: ‘data dependent’.
Secret Weapon
And keep in mind the Fed has a ‘secret weapon’: that central bankers everywhere are all relieved by the recent resurgence of US economic strength and inflation. While inflation elsewhere seems a bit more based on transient factors like food and energy prices, the return of any inflation at all is a relief for central banks. That is because they are very much admittedly better at taming rising inflation than resurrecting it from a deflationary phase that has plagued them in recent years. They’ll take whatever they can get.
And the extended psychology inherent in that inflation fighting skill compared to less reliable deflation countering tools is simple: They can only productively drop rates so far prior to the extreme low rates being counterproductive, with little more they can do from the proverbial ‘zero bound’. Attempts to do so have not been well received by the banking communities and political class in the countries who have had to implement that.
Of course, the lack of further stimulus potential once base rates drop to zero is the reason we have seen those Quantitative Easing monetary stimulus programs. Those have also come into question as any real economic benefit versus merely producing financial excesses, as has been verified by the US economic activity versus equities markets performance dichotomy over the previous five years prior to late 2016.
Happy Central Banks
So much as it is with other central banks, the Fed’s secret weapon in the event that economic growth and the attendant inflation outpace its forecasts is simple:
There is no economic rule or central bank protocol which prevents it from raising the federal funds rate more than 25 basis points at any given meeting. That also applies to the ability to raise rates at ‘non-press conference’ meetings (the press conference can be easily enough arranged), or even in between scheduled meetings if necessary to do so.
So compared to restraints on reducing rates from any already depressed levels, the central banks are all very happy to see inflation return. It is something they are far better equipped to deal with compared to deflation. And the additional blessing for Janet Yellen & Co. today is the hopefully temporary stall in the Trump reform agenda will allow her to remain just a bit circumspect. In other words, she will not need to commit to the more aggressive additional three rate hikes this year at this time, which might have a negative impact on the softening bull trend in the US equities.
Recall the OECD Concurs
As reviewed at length a week ago in our Commentary: OECD versus ADP post, the Organization for Economic Cooperation and Development (OECD) concurs with the Fed’s current circumspect views of the economy. While that is especially the case globally on the political risk from rising populism, it also has a definite economic basis in the current cycle’s lack of productivity growth.
Rather than review any of that here after such an extensive discussion last Wednesday, please just link out to the OECD major semiannual Interim Economic Outlook formal presentation by its estimable Chief Economist Catherine Mann. While it is very interesting to see her specific emphasis on various aspects of the full report, OECD always also does a great job of summarizing key points in the associated PowerPoint presentation accessible on that page. For anyone interested in all of the details, there is also the full report available via a link on that web page.
Market Response
However as noted above, it is clear it has not been ‘fear of Fed’ that has driven the recent US equities selloff since the recent new all-time highs. It is more so the disappointment with the potential for Trump’s reform agenda to be implemented timely after the impasse over the House healthcare reforms plan. As noted repeatedly, those are an essential precursor to the more important tax reform effort. Therefore as also already noted in the opening of this analysis, US equities that are leading the others may not restore their previous bullish tone even if Fed Chair Yellen is totally ‘angelic’ in further benign (no more than two further hikes planned for 2017 at present) communication today.
The important consideration is to wait until after the FOMC announcements and Chair Yellen’s press conference to see how the US equities and other markets react after all of those influences are priced in. Considering that ‘received wisdom’ noted above is that the US equities have discounted the heavily foreshadowed federal funds increase today, it is possible they will hold up well into and directly after the event.
However, equally as important in the scheme of things (if not more so) is the overall response late today into tomorrow. Even if any Yellen circumspection is well received, unless there is also some sort of resolution of the US healthcare reform impasse the situation might revert back to concerns that have been more critical for the current US equities selloff.
Market Observations Remain
All of the Evolutionary Trend View indications remain much the same as the Market Observations in the lower section of our WEEKEND: Hawkish Draghi? & Bull Age post. That said, just a quick update on the US equities indicates that sustained aggressive increases in weekly MA-41 (as it loses old lower Closes from the early 2016 selloff) March S&P 500 future mean extended weekly Oscillator levels are back to moving up roughly $7 each week. Most important at present is the extended weekly Oscillator resistance above the 2,300 area rises to the already tested 2,362-67 range this week. That is now also consistent with the recent 2,370 congestion over-under from the last several sessions.
If it does continue to trend higher from near-term support, the ultimate Oscillator threshold is up into the 2,392-97 range (weekly MA-41 plus 190-195) this week. That is also consistent with the recent 2,401 new front month S&P 500 all-time high. That sort or Oscillator extension has only been seen during extreme rallies like into early April 1999.
However, even if it fails back below 2,362-67, lower congestion supports and Oscillator areas are into the interim 2,350 and 2,320 congestion and the more major 2,300 area. ,
The govvies have been supported of late by the weakening up trend in the equities, with even recently weak sister June Bund future now recovering modestly back above the 159.50 Tolerance of the 160.50-.00 congestion support violated late last week (after the typical early expiration of the March contract last Wednesday.)
In foreign exchange the US dollar has maintained its overall bid against the developed economy currencies, and even improved a bit against the emerging currencies that had been encouraged by the more upbeat ‘risk-on’ psychology that is currently reversing a bit on the US equities weakness and attendant commodities weakness.
The most glaring example of the latter is of course WTI Crude Oil, where front month futures have spilled (on the back of heavy inventories and fresh production) from the 54.00-55.00 area two weeks ago to below the key 50.00-49.00 support. And that points toward interim 47.50 congestion or even the more major 45.00 area support.
Yet it is not just Crude Oil that suffered. Everything from Copper to Soybeans to Cotton have weakened on the general reversal of the upbeat anticipatory ‘risk-on’ psychology associated with the Trump administration economic and tax reform agenda running into a rough patch.
Therefore, as important as the FOMC communication this afternoon might be, the more important influence in the context of the recent near term economic data improvement will almost certainly be the next developments on the US healthcare reform plan.
▪ The Extended Trend Assessment with full Market Observations remains the same as the full update in the lower section of our WEEKEND: Hawkish Draghi? & Bull Age post noted above. We refer you back to that for any of your specific market interests.
The post 2017/03/15 Quick Take: ‘Fecstasy’ or ‘Fedache’? appeared first on ROHR INTERNATIONAL'S BLOG ...EVOLVED CAPITAL MARKETS INSIGHTS.