We said on Tuesday that Wednesday was going to be epic, and luckily we adverted epic failure and were rewarded with silence. Nothing new, nothing earth shattering, just more of the same…stay the course…and we will take that as an epic success.
The Fed continues to give us no real answers from the FOMC meeting statement (Federal Open Market Committee -The branch of the Federal Reserve Board that determines the direction of monetary policy) that was released on Wednesday. Second quarter GDP expanded at 2.3% and Q1 GDP was revised up to 0.6% from the previous 0.2% contraction. In the statement, the Fed said the economy was expanding moderately and that rates would be left unchanged.
In this case the silence of the Fed did little to calm foreign or domestic equities markets and the commodity slide, as we continue to be short the energy sector. The global economy remains on shaky ground and the United States remains one of the few bright spots in the world.
Most of Wall Street has now reported strong and or growing earnings helped stock buyback bonanza that has helped boost earnings per share, however fear of lower future earnings have equities selling off from the market highs.
We do not have a crystal ball, but it has long been our belief that a rate hike would not have been appropriate at this time. Though the Fed speaks with silence, they have made it clear that rates hikes are coming when the data shows that it is appropriate, regardless of whether the global and domestic economy is truly ready swallow it or not. The federal funds futures market is discounting a 40% chance of a rate hike at the next meeting on Sep 16-17, a 52% chance of a rate hike by the Oct 27-28 meeting, and a 96% chance of a rate hike by the Dec 15-16 meeting.
There does not seem to be enough that could change in the next few months to boost economic outlook to call for a September hike. An October rate hike could really put the brakes on holiday spending which would have a major impact on spending and put a real hit on the Q4 numbers. The last thing the Fed wants is to start off 2016 behind the 8 ball. December may shape up to be the best hope of an adverse market reaction, but no matter how bad main street wants Washington DC out of the lime light, with the 2016 election year in around the corner, the closer to election date we get the more front and center a hike will become. You can bet whatever the Fed does will be the center of what will likely be the number one priority of candidates and voters…the economy.
Since the Fed remains silent, we have to use some clues and look around the world. Though there are millions of variables and data points, economics boils down to simple common sense. Common sense tells us that a raise hike is not yet justified. At this point we will take Wednesday as an epic success! On the flipside, we have noted that global economic health looks less than excellent. We know that rates cannot stay low in perpetuity, but if a recession is coming there will be very fee tools to fight it if rates are at or near zero, and for that the Fed is running out of time.
It seems that Atlanta Fed President Dennis Lockhart feels that we are running out of time, he was quoted that it would take “significant deterioration” in the U.S. economy for him to not support a rate hike in September. Lockhart’s opinion is especially notable as he’s considered a centrist on the FOMC whose views typically mirror the consensus.
The above article is an excerpt from EQS Trading’s Weekly Publication on the Commodity Markets called “Signals” which we write and publish every Monday. EQS Trading also publishes a daily “Trade Signals” email that provides in-depth “short” and “long” recommendations and trade strategies for the commodity market with entry prices and stop loss levels.