Archive for category: Investing

The S&P 500 is now down 2.5% from last week’s fresh all time highs, trading well below support at both the recent 1980 level as well as the 50 day moving average (1976).

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Last Week

There were plenty of economic reports last week (and they were in aggregate slightly weaker than expected) but the real focus was on the FOMC. While the Fed’s “hawks” seem to be gaining strength, the takeaway is that the expectations for policy remain unchanged.

Starting with the Fed, you know by now that they kept the “considerable time” phrase in the statement. Generally speaking the statement was considered slightly “dovish” when compared to expectations (which got a touch too “hawkish” going into the meeting).

But, the “dots” were increased, implying Fed officials now expect interest rates to rise faster than they envisioned back in June, and that was taken as “hawkish” by both the bond and currency markets.  So, depending on which camp you’re in (equities vs. all other assets), the Fed was both “hawkish” and “dovish.”

Stocks rallied after the meeting because, while the Fed was on balance slightly more “hawkish” in an absolute sense, they certainly aren’t going to pull forward tightening at this point. So, the Fed will remain a tailwind on stocks.

But, from a risk standpoint, I took this Fed meeting to show that it’s just a question of “when” the Fed gets more hawkish. The risk of a “hawkish” surprise in the coming months is rising, while the risk of a “dovish” one has diminished almost to zero. So, incrementally the risk of a “hawkish” surprise is rising, and that makes me less bullish on U.S. stocks generally. The risk of a “hawkish” Fed surprise that rattles markets is rising, while the risk of a “dovish” surprise is virtually nil at this point.

Turing to the actual data, it was a bit soft last week. August industrial production missed and, even stripping out a big negative for a drop in auto production, the number was still underwhelming.

Housing starts also missed estimates, while the first look at September regional manufacturing activity was mixed, with Empire State manufacturing beating while Philly slightly missing. (But both remain strong on an absolute sense.)

The biggest surprise of the week came from CPI, which dropped -0.2% in August, while “core” CPI was flat month-over-month for the first time since January.  It was a surprise, and I saw some analysts try and spin it as a “dovish” influence on the Fed. But I don’t think any moderation in inflation would make the FOMC more dovish at this point, as deflation simply isn’t a threat.  The FOMC knows they have to start removing liquidity before something bad (like a bubble) starts to form (or pop) depending on your opinion of the Fed.

This Week

The biggest release to watch this week is the global flash manufacturing PMI.  The most important number is China’s, which comes tonight.  Recent data show the Chinese economy is losing some steam, but we’re still a long way from any renewed fears of a “hard landing.” So, even if this number is a miss, it likely won’t be too much of a negative influence.  But, that said, if it drops below the 50 level, that could weigh on markets tomorrow morning (so, more of a short-term thing than a negative macro event).

Europe comes Tuesday morning and markets will want to see some incremental improvement over August (the absolute level will be very low, but at this point it’ll be encouraging if Europe is at least seeing some incremental acceleration of activity).  And, here in the U.S., everyone expects the number to be strong. But if it’s very hot, that may push levels of Fed angst a touch higher, so the stocks bulls need a “Goldilocks” to slightly weaker number. Outside of the global PMIs, it’s quiet internationally.

Domestically, we get more housing data (Existing Home Sales today, New Home Sales Wednesday). Again, the market is looking for constant reinforcement that the housing recovery remains in gear and is gaining momentum.

Bottom line is the global flash PMIs are the most important release this week, and as long as they meet general market expectations (slow but positive growth in China and Europe; strong growth in the U.S.), they shouldn’t elicit too much of a response).

Bad is Good in Europe

This morning the ECB released it’s first tranche of TLTRO funding, and it flopped, badly.  Takedown by banks of the offer was just 82.6 billion euro, a little over half of the 150 billion that was expected.

But, this low figure is seen as only further increasing the likelihood that the ECB will have to eventually launch a large scale QE program  – and European markets are all sharply higher on the news.

The Fed’s Perception Problem (and why it’s Hawkish)

If the FOMC does indeed become incrementally more “hawkish” today, it’ll likely be because of the growing fear among Fed officials that the market views the Fed as simply being too “dovish.”

We’ve heard several Fed presidents reference this, and last week there was a San Francisco Fed paper citing this potential problem.

And, the worry that the market doesn’t “believe” the Fed isn’t some general “feeling” – it’s actually backed up by hard data.

Fed Funds futures, which trade on the CME and can be accessed via this link, reflect the market consensus of where the Fed Funds rate will be at the end of each month.  And, simply put, the market is reflecting a much more dovish Fed than what FOMC members are stating.

The Fed Funds futures prices shows a much slower and more gradual increase in interest rates than the official Fed projections – plain and simple.  And, frankly, this type of discrepancy is significant.

And, it’s a problem for the Fed.

If the Fed isn’t being taken seriously (as a hawk) then that poses a potentially serious problem. While the Fed wants to start to restrain the risk-taking and the unbridled “chase for yield” it’s manufactured over the past several years, if the market doesn’t believe the Fed will actually raise rates, then the excessive risk-taking will continue—potentially resulting in bubbles.

Point being – there is some room here for the Fed to give the markets a bit of a “hawkish” dose of reality today – if not via the removal of “considerable time,” then via other means, including the “dots” as we described yesterday, or via Yellen’s press conference.

Point being, the propensity for the Fed to give us a “hawkish” surprise is rising. While that won’t guarantee the bond declines will continue in the near term, the simple fact is that the setup is for the Fed to, finally, be slightly more hawkish. That is, until the market, as reflected by Fed Fund futures, starts to believe rates will rise sooner than is currently the consensus.

Finally, I’ve mentioned frequently that the pace of the increase in rates is more important than the date rates start to rise.  You can monitor both via Fed Fund futures (or you can just let us do it … we’re watching it either way).  The way it works is you subtract Fed Fund futures from 100 to get the implied Fed Funds rate.  So, right now the market anticipates the first rate increase to occur in June 2015 – and if that changes tomorrow, one way or the other, Fed Funds futures will let us know.