Forget the Olympics! This is where the real game is.
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
When things are quasi-good, the market is happy because their favorite muse (the Fed) is more likely to wait to raise rates. If the economy is bad, the market is sad because it doesn’t like recessions. If the market is good, it is sad too because that means the love affair with ultra-low interest rates might be leaving us sooner.
The key word is might. Basically Janet Yellen, during her speech in Jackson Hole Wyoming last Friday, said that things are improving and the Fed members are looking as more data comes in.1 Saying the Fed expects to see continuing strength in the labor markets and inflation rising to over 2% in the next few years is like telling kids at a 5-year old’s birthday that it is actually going to be over soon and the clowns are going home. Ok, maybe clowns going home is a good thing, but it just takes the wind out of the party!
Fed Vice Chairman Stanley Fischer was interviewed not long after Janet Yellen’s speech and when asked by CNBC reporters about the prospect of two rate hikes this year with the first potential being September’s meeting, he responded, “I think what Yellen said today was consistent with answering yes to both your questions, but these are not things we know until we see the data.”2
Oh, the tragedy of uncertainty! The FedWatch tool, a fascinating online rate-watch tool saw a sharp increase in probability for a September rise following these two statements. The following is how the charts looked not long after the speeches.
A 64% chance of at least a 25 basis point (one quarter of a percent) hike in September is a clear indication that the market sees the potential. In fact, in anticipation of the speeches this past week, the probabilities have spiked dramatically. (Notice how the previous day the probability was even higher than after the speech!)
So you might be wondering, what happens next? Well, there is going to be a lot of very smart people guessing and nobody knows for sure, even the Fed. Forget the Super Bowl, forget the Olympics, forget the World Cup, Stanley Cup and the World Series. This is where the real game is! (At least for some of us…)
The data released Friday was also a bit mixed. The GDP was revised down slightly due to lower than previously estimated spending by state and local governments. It was largely in line with expectation so it wasn’t too shocking. Consumer sentiment also eased a bit according to the Reuters/University of Michigan Consumer Sentiment Index. Personal consumption in the first half of the year was the big plus that kept the numbers from dropping too much, but that could be tested since it was expected to rise and it actually fell.3
Here is how the chart for Consumer Sentiment looked prior to the preliminary reading. Note that the last reading had it at 90, it was expected to rise and has fallen to 89.8.
This doesn’t mean the sky is falling, but it is interesting. The Fed is talking about all of the good things in the economy that will allow them to consider raising rates, and the GDP is the lowest it has been since 2013. If you look at the chart below, we are far from average for even this last recovery phase. However, I think the Fed is getting backed into a corner as they need to have rates higher before the next recession.
So, in summary, we can say that really nothing has changed! It only took me nearly 700 words and three charts to say that, but I want you to know that despite all of this, it does not appear that the sky is falling, is about to fall or anything in between those two options. It simply means that clarity is not likely and it is possible that there could be a few volatile trading days ahead, but we have a huge election, Fed meetings and lots of data to look forward to!
1 Fed’s Yellen says case for another interest-rate hike has strengthened. Greg Robb. MarketWatch Aug 26, 2016. http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26
2 Fed’s Fischer: Yellen’s speech consists with possibility of 2 interest-rate hikes this year. Greg Robb. Market Watch Aug 26, 2016. http://www.marketwatch.com/story/feds-yellen-says-case-for-another-interest-rate-hike-has-strenghtened-2016-08-26
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 16-266