As I published in our weekly EQS Trading “Signals” publication.
Does it feel like Groundhog Day? No, not February 2nd, but the 1993 Bill Murry classic film “Groundhog Day.” Since December 16, 2008 we have had the Fed benchmark rate pegged at 0-0.25%, and Thursday all eyes were on Janet Yellen and the Fed to await the announcement of whether the economy had again seen its shadow or if it would finally be time for lift off.
Like Phil Connors (Bill Murray), we are left living the same time-loop, but unlike audiences that love watching the movie over and over, the market is just plain tired of the Fed drama. After the release of the Fed minutes, Yellen held a press conference leaving the market with no clear direction. On one hand, the committee wants to raise, but on the other hand, we have met some targets, but not others. We have strong jobs, but wages are not high enough; we have a strong domestic economy, but a weak world outlook; we have inflating service prices, and deflating commodity prices. The list goes on and on, and we are stuck living the same Groundhog Day.
There are arguments by Wall Street, Main Street, and Academia both for and against hikes, for and against a “stay the course” policy, and for and against easing. There is no clear right and wrong answer; however, at least an answer would give us direction. All the Fed did was to wake us up again the next morning to Sonny and Cher, “I Got You Babe.” The lack of direction from the Fed sets up uncertainty, and what do we say about uncertainty? That’s right, the markets hate uncertainty!
The inevitable rate hike is still hanging over the stock market, like the blizzard about to hit Punxsutawney Pennsylvania. On the table was a wimpy quarter point hike. A hike would have allowed the market to move to the next stage of assessing how the global economy will be able to adjust to the slow normalization of Fed policy, as there are only two options in the long run, raise rates or inflate the bubble to the point of a burst that no monetary or fiscal policy can stop.
After the meeting, the markets proceeded to substantially delay expectations for the Fed’s first rate hike. The market is now fully expecting the Fed’s first rate hike by the March 2016 FOMC meeting, much later than pre-meeting expectations for the Dec 2015 meeting. The federal funds futures market is now discounting the chances for a rate hike at only 24% at the next FOMC meeting on Oct 27-28, 58% by the Dec 15-16 meeting, 72% by the Jan 26-27 meeting, and 100% by the March 15-16 meeting. The odd changes have almost been Groundhog Hog Day, themselves, as they have basically just kicked the can down the road to the next period.
There will never be the perfect time to raise rates, and to the Fed’s credit, at this meeting they noted what has been on the mind of the markets, and that is the world. We have reported in multiple issues, the world economy is not healthy. Raising rates too soon could be the straw that breaks the camel’s back, but as academia would argue, sometimes things have to get worse before they can get better.
The economy is made of events that create business cycles and we are at the end of such a business cycle. However, this current business cycle is different; we are in “uncharted” territory. Typically, as a cycle starts, rates are lowered and economic output rises, rates go up and cool the economy; the cycle ends, recession kicks in and then the cycle starts over when fiscal and monetary policy is used to stimulate the economy to kick start growth again. The last business cycle ended with the “Great Recession,” and this business cycle has been entirely played out with stimulus. This cycle is different in many ways, including the importance of the globe. It is not the duty of the FMOC to “police” the world economy; however, as the world has gotten “smaller” what happens to the world, greatly effects the American economy. We know that the global economy is cooling. The crashing of commodity prices is a leading indicator of recession, the commodity market has spoken, and the business cycle is ending.
When things are great, living the same Groundhog Day time-loop is not a bad thing. The markets like “Groundhog Day” because the market has certainty about what is going to happy tomorrow. The Groundhog Day we are living now is one of uncertainty. We know that recession is coming or here for many economies around the world, and we know that the American business cycle is ending. We are living a Groundhog Day of uncertainty. Actions speak louder than words. The Fed could not even manage a baby hike. What does the Fed’s stay the course action imply about the real risks? And what success does the Fed have, other than creating a commodity, equity, and junk bond bubble with their nearly eight years of stimulus in some form or another? There are and will be pains from tightening, and there are and will be pains from doing nothing. The Fed has just said it; we live in a small world. What will the Fed do if volatility goes up instead of down? How can we manage a global economy with American domestic policy?
Phil Connors had to get the girl to fall in love with him to break the Groundhog Day loop and make it to the next day. What is it going to take to break our economic Groundhog Day and keep from seeing the shadow of more economic winter?
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.
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