March 20, 5:00 pm EST

The Fed met today and confirmed the signaling we’ve seen since early January.

With the luxury of solid growth, low unemployment and subdued inflation, they have been signaling to markets, since January, that they will do nothing to rock the boat.  That move has restored confidence and stock prices (a reinforcing loop).

So, the Fed has gone from mechanically raising rates (as recently as December) to sitting on their hands.  And today they are forecasting no further rate hikes this year, and they are ending the unwind of their balance sheet in September (ending quantitative tightening).

This all looks like a move to neutral, but given the rate path they had been telegraphing up until the end of last year, this pivot is effectively easing — especially since these moves look like pre-emptive strikes against the potential of Brexit and U.S./China trade negotiations going bad.

With that, we have a big technical break in the bond market today.  The U.S. 10-year government bond yield (chart below) broke this important trendline today.


This trendline represents the “normalization” of market rates following the Trump election.  Following the election, with the optimism surrounding Trumponomics, the market started pricing OUT the slow post-recession economic growth rut, and pricing IN the chance that we could see a return to sustained trend growth.

So, what is it pricing in now?  I would say its pricing in the worst-case scenario – a no deal with China.

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June 13, 5:00 pm EST

Watching the media and expert community digest the Fed decision is always interesting.

They are all programmed to home in on the worst-case scenario. It’s very similar to the way they parse politics.

In this case, the Fed projected an extra rate hike this year. They were projecting three hikes for 2018.  Now they are projecting four hikes for the year (two of which are now in the rear-view mirror).  Why an extra hike?  Is it because they want to disrupt the recovery and undo all of their efforts of the past decade to manufacture that recovery?  No.  It’s because they think the economy is good!  In fact, Powell (the Fed Chair) said “the main takeaway is that the economy is doing very well.”

And when asked about the impact of tax cuts, he said, we’ve yet to see the benefits. But, it should “provide significant support to demand over the next three years … encourage greater investment … and drive productivity.”  This is exactly what we stepped through last week in my Pro Perspective notes (here).  We laid out the components of GDP (consumption, investment, government spending and net exports) and we talked about the setup for positive surprises feeding into an economy that’s already running at near 3% growth — because pro-growth policies are just beginning to show up in the data!

With that, it should be no surprise that the Fed feels more comfortable telegraphing another hike, from what is still very low levels of interest rates.

Now, what is the negative scenario the pundits have been harping on?  The yield curve.  With the Fed gradually walking up short term rates (rates they set), the benchmark market interest rates (namely the 10-year government bond yield) has been soft.  That creates yield curve flattening, which gets the bears excited that a yield curve inversion could be coming (a good historical predictor of recession).

Why is the 10 year yield soft?  As we’ve discussed, the two major central banks that are still in the QE game have been anchoring longer term interest rates through their outright purchases of global government bonds (including lots of U.S. Treasuries, which keeps a cap on yields).

On that note, we have the ECB tomorrow.  And the Bank of Japan will meet on monetary policy tomorrow night.  The trajectory of global monetary policy is UP.  And the more the Fed does, the more it forces that timeline elsewhere in the world to follow the Fed’s path on normalizing rates.  The ECB will be following the Fed normalization path soon.  And the Bank of Japan will be last.  And when we get hints that it’s coming sooner rather than later, the yield curve will start steeping, and the bears will have a very hard time justifying their “sky is falling” view.


December 5, 2016, 4:00pm EST

On Friday, we looked at five key charts that showed the technical breakout in stocks, interest rates, the dollar and crude oil.

All of these longer term charts argue for much higher levels to come. Remember, the big event remaining for the year is the December 14th Fed meeting. A rate hike won’t move the needle. It’s well expected at this stage.  But the projections on the path of interest rates that they will release, following the meeting, will be important.  As I said Friday, “as long as Yellen and company don’t panic, overestimate the inflation outlook and telegraph a more aggressive rate path next year, the year should end on a very positive note.”

On that note, today we had a number of Fed members out chattering about rates and where things are headed.  Did they start building expectations for a more aggressive rate path in 2017, because of the Trump effect?  Or, did they stick to the new strategy of promoting a view that underestimates the outlook for the economy and, therefore, the rate path (a strategy that was suggested by former Fed Chair Bernanke)?

The former is what Bernanke criticized the Fed as doing late last year, which he argued was an impediment to growth, as people took the cue and started positioning for a rate environment that would choke off the recovery.  The latter is what he suggested they should move to (and have moved to), sending an ultra accommodative signal, and a willingness to be behind the curve on inflation — letting the economy run hot for a while (i.e. they won’t impede the progress of recovery by tightening money).

So how did the Fed speakers today weigh in, relative to this positioning?

First, it should be said that Bernanke also recently criticized the Fed for the cacophony of chatter from Fed members between meetings. He said it was confusing and disruptive to the overall Fed communications.
So we had three speakers today.  New York Fed President William Dudley spoke in New York, St. Louis Fed President James Bullard spoke in Phoenix, and Chicago Fed President Charles Evans speaks in Chicago. Did they have a game plan today to promote a more consistent message, or was it a more of the disruptive noise we’ve heard in the past?

Fortunately, they were on message.  Only Dudley and Bullard are voting members.  Both had comments today that spanned from cautious to outright dovish.  Dudley, the Vice Chair, wasn’t taking a proactive view on the impact of fiscal stimulus — he promoted a wait and see view, while keeping the tone cautionary.  Bullard, a Fed member that is often swaying with the wind, said he envisioned ONE rate hike through 2019. That would mean, one in December, and done until 2019.  That’s an amazing statement, and one that completely (and purposely) ignores any influence of what may come from the new pro-growth policies.

This is all good news for stocks and the momentum in markets. The Fed seems to be disciplined in its strategy to stay out of the way of the positive momentum that has developed.  And that only helps their cause.  With that, if today’s chatter is a guide, we should see a very modest view in the economic projections that will come on December 14th. That should keep the stock market on track for a strong close into the end of the year.

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