Fed Update: A 2-Day Meeting?
A: Its been a while since I delved back into the true me, and focused on trading and the equity markets, and why stocks have been rallying since early August and what that all means in terms of the fed's next move, (not next meeting). And whats up with the fed extending its usual 1 day meeting to a 2 day one; as I just saw reported on CNBC? Here are some thoughts.
The fed's 2-day meeting ends Wed Oct. 25th at which time we will most likely get a NO CHANGE - RATES REMAIN UNCHANGED decision from the FOMC. What we do NOT know is the accompanying statement that will be issued and whether or not more hawkish words are included as the war against inflation continues.
Fact is, inflation is being very stubborn right now while energy price declines sparked a recent stock rally; at least this is my opinion. Since the price of one gallon of gas starting plunging close to 35%, stocks began going higher. Now energy prices are at year lows and equity markets are at 5+ year highs. The equity markets are PRICING IN economic data that is expected to come from corporate America. That means GOOD NEWS in the coming months regarding the economy...
...And THAT MEANS, more inflation worry's and rate hikes to think about to slow things down by the fed! For all of you getting caught up in the recent business headlines that promise rate cuts by mid 2007, I say...DON'T HOLD YOUR BREATH!
I would expect rates to stay where they are, if not rise a little more, in the near future. We must remember that fighting inflation now and risking a recession later is better for our long term economic health than if inflation goes unfended. Rates are STILL at very low levels, historically speaking, and it would be narrow-minded to think the next move could ONLY be a cut.
Factors that should be watched to see why the fed would raise rates again:
STOCK MARKETS CONTINUE TO RALLY
Equity markets are a leading indicator of publicly traded corporations. Investors have the opportunity to invest in the near-term prospects (6-18 months generally) of any public company in the hopes that future revenue growth will meet or exceed anaylst expectations (preferably exceed obviously); like Google, NASD: GOOG, has been doing lately!
Right now, with equity markets charging full speed ahead, I'm thinking its the cost savings in energy that is going to be one of the main reasons for higher reported income by corporate America in the coming 3-6 months; hence the rally. If all else stays as predicted, but sky high energy costs suddenly plunge in a very short period of time, than corporate profits rise as costs shrink.
Or is it some other fundamental? Probably. But who cares. Stocks have been going higher and thats all that matters right now. Money is betting on a good economy, not a slowing one, and the fed knows this. Check out this 6 month chart of the DOW JONES Industrial Average, courtesy of Yahoo Finance:
If stocks continue to gain, expect the fed's chances of raising rates (as estimated by the fed funds futures) to RISE!
ENERGY COSTS BOUNCE BACK
Energy prices have corrected beautifully over the past 3 months giving relief to millions of Americans, corporations, and at the same time giving headaches to hedge funds and traders still long the commodity. Check out this nosedive of a chart for crude oil:
Its a double edge sword with the price of oil. If oil prices rise then the added costs may trigger iinflation down the road by making products more expensive too (companies have to add on those extra costs somewhere). On the other hand, if energy prices fall then both the consumer and the company show more money at the end of the day that could eventually be used to SPEND, helping to fuel the economy. Either way, it seems inflationary.
I would think that the former is more on the fed's radar though and that as energy prices rise, so do the chances of another fed rate hike!
HOUSING #'s COME IN STRONGER THAN EXPECTED
What the heck am I talking about here? Housing #'s coming strong? Why not! Take a look at the latest Housing Starts numbers that came in last week:
According to CNN Money:
Home building may be ready to shake off its 2006 slump, as housing starts posted the biggest jump since January, according to a government report Wednesday. The report also showed that building permits, seen as a sign of builder confidence, fell more than expected.Give us some more data like this and all of a sudden the fed will STOP using the fast cooling housing market as an excuse to raising rates and fighting inflation!The number of new projects that home builders started rose to an annual pace of 1.77 million in September, according to the Census Bureau, from the 1.67 million pace in August. The 6 percent increase in September contrasts with a decline in starts in six of the previous seven months.
If housing news is good, than the fed will have the clear 'go ahead' to fight inflation by raising rates.
BOND YIELDS CONTINUE TO RISE
Hard to argue the bond market. When you start to see short term yields on the rise it means that bond traders are betting on either a firm hold for longer than thought with current rates or another rate hike. Take a quick look at short term bond yields since yesterday, last week, and last month:
Bond yields will rise with the anticipation of firmer monetary policy ahead!
WHAT I THINK THE FED SHOULD DO: No Change; Change of wording indicating inflation is STILL a hazard and that the 'further firming might be needed' phrase be re-inserted or similar.
WHAT WILL FED PROBABLY DO: No Change; No notable change in wording. Inflation still a concern but no new phrases added.
Comments (1)
Good call Noah, keep polishing that crystal ball of yours, it's working well!
I agree with your analysis but i heard that reports from the National Assoc. of Realtors put home sales down a further 1.9% in September. I think the reason for the stronger numbers of starts is probably due to the backlog of work that builders are working through (as suggested in the CNN Money article you linked), given that permits are down (and more than expected).
I think it's too soon for anyone to call the end to the "cooling period", and it will certainly be interesting to see what transpires from here.
Anyhoo, as usual, good stuff!
Posted by Dave | October 25, 2006 5:18 PM