The world in which we operate, from a market perspective, has become so focused on the words of central bankers that nothing else really matters. Economic data, global politics, supply and demand, company fundamentals and technical chart patterns mean less and less as Fed-speak means more and more. On Friday the Dow lost almost 400 points on tough-Fed talk and yesterday, the Dow was up over 200 points on dovish Fed-talk.
Headlines from last week point out the Fed-centric world in which we live, as well as the confusion that reigns:
In my thirty years around these markets I would have never been able to predict the absolute ridiculousness of market action driven by rumor, conjecture and ‘hope’ of one Fed-induced outcome over another. But here we are and this is the world we must trade and invest in. Words parsed from speeches rule the day for the high frequency algo traders. Yes, it’s crazy, as this graphic from the WSJ shows:
As the cliché notes, a picture is worth a thousand words, and as these graphics show, the economy is not getting any better, no matter how many times Fed members try to wish it. As ZeroHedge pointed out, GDP estimates continue to follow the same pattern, starting the year with optimism and ending ratcheted lower:
For the sixth year running, exuberant GDP growth projections have been drastically marked down to a new normal low. But this year is different, not only have 2016 GDP growth expectations been marked down to post-crisis lows, but The Fed – in all its wisdom – is determined to raise rates (twice if you believe them) because, in their own words “the economy is in good shape and headed in the right direction . . .”
Does this look like the right time to raise rates?
The ISM data continues to show weakness:
Commenting on the PMI data, Chris Williamson, Chief Economist at Markit said:
“The weak PMI readings send a downbeat note on economic growth in the third quarter. Taken together, the manufacturing and services PMIs are pointed to an annualized GDP growth rate of a mere 1%, similar to the subdued pace signaled by the surveys throughout the year to date, suggesting that those looking for a strengthening in the rate of economic growth will be disappointed once again.”
GDP Per Capita, an interesting way to look at economic activity (and one that I had never seen before) show just how big the drop-off has been:
Over in Europe things aren’t much different. It´s been just under a year and a half since the ECB buying bonds and, as The FT notes, the ECB has now purchased over EUR 1 trillion in government and corporate bonds since it began QE. And in Germany we are ready to witness another historic milestone as private companies join the negative yielding bond club:
As for market action, the big news has been the breakout of interest rates from recent levels. The chart below, courtesy of StockCharts.com, is the 10-year Treasury Yield and you can see that on Friday rates popped a bit above their recent 2-month trading range:
This comes on the heels of more Fed-speak about raising rates at the FOMC’s September meeting next week. Will they or won’t they? I am solidly in the ‘won’t’ camp, but trying to handicap what a bunch of academics will do is impossible, at least for me. I would argue that with the markets throwing yet another tantrum in reaction to hiking, a Presidential election around the corner, and continued weak economic data, the FOMC has the wiggle room it needs to continue to kick the rate-hike-can down the road. They’ve been successful at this for almost a decade, so there is no reason for them to change things up at this point. We’ll all know next Wednesday. Place your bets on the FOMC Roulette table and buckle up, or sit in cash and enjoy the show.
If you have questions regarding this article, please contact your Sprott Global financial advisor or the author Tim Taschler at firstname.lastname@example.org or at 800-477-7853.
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