2016/08/30 Commentary: More Fed Follies

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COMMENTARY (Non-Video): Tuesday, August 30, 2016

More Fed Follies

As explored in last Wednesday’s Fed-ticipation post, the reason for many market participants frustration as well as the stagnant trend activity prior to last Friday was Fed-ticipation. That’s the attempt to understand what the US Federal Reserve is likely to do next... and when. The term is a pun on the old Carly Simon song Anticipation. While the overall topic of the song is on a wholly different aspect of interpersonal relations, the refrain has a very interesting couple of lines that relate to the previous and current frustration with a Fed whose minions still seem to be on so many sides of the rate hike fence that they don’t know where the fence is anymore. For more on that see last Wednesday’s Fed-ticipation post.

The Fed-ticipation refrain parody of Simon’s tune is only the substitution of the title word, as in Fed-ticipation, Fed-ticipation, “Is makin' me late, Is keepin' me waitin'.” Little doubt some who have worried about a Fed hike have been late to the bullish equities party, and that the Fed has kept us all waiting endlessly for much touted rate hikes. Keep in mind that at the time of the December rate hike there were supposed to be four of them this year.

And after all of the alleged ‘clarification’ from Janet Yellen’s somewhat more hawkish views that were reinforced by Fed Vice-Chair Fischer’s missives at this year’s annual KC Fed Jackson Hole Policy Symposium, equities and govvies rallied back together Monday from Friday’s mutual selloff. How could this be? Surely the Fed might now raise rates as early as the September (major projections revision and press conference) FOMC meeting!

Yet in the event cooler heads prevailed once again in the wake of Monday’s US Core Personal Consumption Expenditure (PCE) annualized 1.60% rise. This favorite Fed inflation and economic indication is still stuck well below 2.00%. Add to that the still weak US GDP for the first half of this year. It highlights the degree to which all of the Obama administration cooing about US Employment gains since 2009 is not the same as the jobs lost in the 2008-2009 crisis. Weaker incomes still point to lower inflation than is consistent with the Fed needing to hike rates anytime soon.

That thesis will be tested once again in this Friday’s next US Employment report release. Along with a somewhat weaker Nonfarm Payrolls estimate than the strength of the past couple of months, Hourly Earnings are projected to dip back to a 0.20% monthly gain from 0.30% in June. The latter might seem a minor shift, yet is very important for the further progress the Fed would like to see in consumer activity like that reflected in that PCE figure. Note that a good part of the Fed’s circumspection through most of 2015 was related to weak Hourly Earnings figures in the 0.00% to 0.20% range.    

And that’s it. Short and sweet in front of Wednesday’s more major end of month data and the new month’s influences beginning Thursday. In spite of the equities and govvies whipsaw since Janet Yellen’s Jackson Hole speech on Friday, The Evolutionary Trend View remains much the same as last Wednesday’s Fed-ticipation post’s Market Observations (in the lower section for Gold and Platinum subscribers.)

Even the strengthening of the US dollar in the wake of the more hawkish Fed perspective has only been a reaction from previous extended US dollar weakness. While the US Dollar Index has pushed back above its .9460 UP Break and the classic .9500-50 over-under congestion, there is still quite a bit of resistance up into the .9650 area. Similarly EUR/USD is only back nearing its major 1.1000-1.0950 support, and weak sister GBP/USD is not even threatening its 1.3000-1.2950 support. While AUD/USD has fallen back from near its .7800 resistance to the .7550-00 range, that remains important support, and USD/JPY strengthening from its vigorous test of the 100.00 area is actually a bit of a risk-on indication as well.

And the greenback strengthening smartly against the emerging currencies is the natural shift from a ‘no rate hike’ psychology into the more hawkish Fed view that was anticipated even prior to Friday. Regardless of previous improvement in the emerging economies’ outlook for various reasons, they are still vulnerable to higher US interest rates due to their businesses’ capital structures.

Yet in the wake of its short-term disastrous experience after last December’s first hike in almost a decade what remains obvious is this: The Fed’s appetite for actually raising rates further will remain ‘data dependent’. Ergo the extreme importance of this Friday’s US Employment report’s key components noted above.   

Thanks for your interest.