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 email@example.com or at 800-477-7853.
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.