During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.
So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.
Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.
No it isn’t!
Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.
But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.
There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.
But there is nothing left to brake the casino’s fall.
With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.
Here’s what to watch in the coming days.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”
Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.
On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.
The fed hike case is built on a strong consumer led recovery. That’s good when people have money to spend, and when wages give them that money to spend. The wages (average hourly earnings) in the jobs reports report showed pay running at a decent 2.8% y/y. Today we get the inflation adjusted wage numbers in the CPI report and they don’t look as hot.
Last month, year on year real average weekly wages dropped for the first time since the start of 2014.
US real average weekly wages y/y
That’s not good news for the supposedly strong consumer and rate hikes won’t make the situation any better.
I’m quite surprised that the Fed will be raising so quickly after the Dec hike instead of letting that hike filter through, and monitoring the effects. To me that suggests that behind the scenes there’s something they are worried about. If they’re willing to hike in a moment when their whole basis for hikes (the consumer) might start finding things tougher, there’s something amiss.
It’s a straw clutch to try and find anything that could derail the hike tonight but there’s plenty of evidence in why they might throw in some additional caution about future hikes, and the wages numbers today may aid that sentiment.
Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.
Gundlach, who oversees more than $101 billion at Los Angeles-based DoubleLine, said U.S. economic data support a rate increase as soon as the next Fed policy meeting on March 14-15, and further rises this year, after a series of false starts in 2015 and 2016.
“Confidence in the Fed has really changed a lot,” Gundlach said on an investor webcast. “The Fed has gotten a lot of respect with the bond market listening to the Fed” now that economic data support the tough rhetoric from Fed officials.
New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Fed Chair Janet Yellen, played a key role in orchestrating the messaging of a March rate hike.
China’s National People’s Congress gets underway this weekend, and investors will get an update on the health of the US labour market.
Here’s what to watch in the coming days.
Li Keqiang, China’s premier, delivers the country’s proposed economic targets on Sunday at the opening of the fifth session of the 12th National People’s Congress, the country’s top legislature.
While much of the discussion takes place in closed-door meetings, economists are paying attention to the Government Work Report and the 2017 growth target. Jian Chang, economist at Barclays, said their base case is for 6.5 per cent growth. He also expects the government to maintain the budget deficit at 3 per cent and inflation target at 3 per cent.
On the politics front, China-watchers will keep their eyes peeled for clues on who could make it to China’s 25-member Politburo and possibly the Politburo Standing Committee (PSC), following a reshuffle of some senior provincial and central government leaders, particularly with the 19th Party Congress scheduled for this fall.
UK chancellor Philip Hammond will present his first budget on Wednesday, and economists expect it to show a decline in gilt issuance.
“The UK economy has outperformed earlier forecasts, and so there should be a bit more revenue to play with, leading to the first decline in borrowing in 3 years,” strategists at TD Securities said. “But we see a cautious budget with few giveaways as the UK approaches Brexit.”
Following Yellen’s speech which did not throw any curve balls to this week’s sharply revised, hawkish narrative by her FOMC peers, a March rate hike – according to Goldman – appears to be in the books. In a note moments ago by Goldman’s Jan Hatzius, the investment bank said that the bottom line is that “Fed Chair Yellen said today that a rate increase at the March FOMC meeting “would likely be appropriate”, as long as incoming data continue to confirm officials’ outlook. We see this as a strong signal for action at the upcoming meeting, and have raised our subjective odds of a hike to 95%.”
Goldman’s key points:
1. In remarks this afternoon, Fed Chair Yellen indicated a readiness to raise the funds rate at the FOMC’s March 14-15 meeting in fairly explicit language. She said that as long as “employment and inflation are continuing to evolve in line with” officials’ expectations, “a further adjustment of the federal funds rate would likely be appropriate”. As a result, we now see a hike at the March meeting as close to a done deal, and have raised our subjective probability to 95%.
2. The remainder of Chair Yellen’s speech focused on the Fed’s post-crisis monetary policy strategy in general, and did not discuss incoming data in much detail. However, given constructive comments about current economic conditions from many Fed officials this week—including from Vice Chair Fischer at today’s US Monetary Policy Forum—we think committee members will see recent news as consistent with their outlook, and therefore supportive of further tightening. At this stage, the February employment report—to be released next Friday—may have more bearing on the committee’s guidance about action after the March meeting than on its decision whether to hike this month.
T.S. Eliot tells us that April is the cruelest month. A great poet he was, but a trader he was not. Caesar was warned about the Ides of March, and investors may find the caution to be particular apropos now. Consider the congestion of events around March 15.
A few days before, March 9 is ECB meeting. Although no policy change is likely, the press conference often elicits a market response. Headline inflation is moving toward the target, though core inflation remains stable and just a little above the 0.6% trough. Still, the risks of deflation have all but disappeared, while growth looks solid and above trend.
The following day the US reports February employment figures. The early call is for a modest slowing of net new jobs from 237k in January to 178k. Such a report would still be solid and above any month in Q4 16. The three- and six-month averages have converged at 183k. Investors will also focus average hourly earnings. The median is a 0.2% increase, which given the base effect (flat report last February), is consistent with an increase in the year-over-year pace back toward 2.7% where it was in the September 2016-November 2016 period. It then ticked up to 2.8% in December before falling back to 2.5% in January.
On March 15 itself, the FOMC meets, and the Dutch hold the first European election of 2017. The market perceives an increased risk of a rate hike at the March meeting. However, in our ranking of Fed signals, we put more weight on the FOMC statement and the speeches by the Fed’s leadership than the regional presidents, many of whom seem more anxious to normalize monetary policy. We do not see the FOMC statement or the minutes from the lastmeeting indicating a rate hike. The word cues were different than before the December 2015 or December 2016 meetings.
The odds of a March rate increase jumped to 70 per cent on Tuesday after the influential head of the New York Federal Reserve said the case for policy tightening had become “a lot more compelling”.
Bill Dudley said in a interview with CNN International, the television network, that data released over the past couple of months have shown that the US economy is on a solid trajectory, and the central bank is more confident now that it will continue to brighten.
“It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased,” he said, according to a transcript posted by CNN.
Mr Dudley, who votes on the Fed’s policy-setting board, added that he reckons fiscal policy will “probably move in a more stimulative direction” — an allusion to the tax reductions and infrastructure spending push promised by US President Donald Trump.