Update, Fed Meeting, Citi and SoGen, US Dollar Crash?
by Victor Sperandeo with the Curmudgeon
Victor on Commodities:
In order of importance, commodities are influenced by the following:
1. The US Dollar/Fed Policy* - commodities are inversely correlated with the dollar;
2. China Growth- mixed to unknown;
3. OPEC Policy on oil- like the Fed, its been all talk with no action on lowering supply;
4. GDP Growth worldwide- weak to poor;
5. War- unlikely, but possible.
* If the Fed were to raise rates, the dollar would likely strengthen. The Fed wants a stable dollar for many reasons. One of them is to prevent oil/gas prices from rising, so that the consumer has more money to spend on other things. Increased consumer spending would boost GDP growth in the second half of 2016. Also keep in mind the uncertainty of the November US Presidential election, which is a key reference point for the Fed. Almost no one predicts them to raise rates at their November meeting. ..
Commodities are currently trend-less. Oil and the dollar are in trading ranges, and will continue as such till the US election. IMHO, commodities (as a whole) go nowhere till after the November elections. West Texas Crude Oil continues (and will likely stay) in a trading range of $40-50. Gold and silver are in up trends and that should continue. Readers may be interested in my earlier post on Gold being in a new bull market. You can read it here.
Heres a chart of the CRB index1 of 19 commodities, which is stuck in a trading range since May of this year:
Chart Courtesy of StockCharts.com
Note 1. The CRB index has undergone periodic updates as commodity markets have evolved and is now known as the Thomson Reuters/CoreCommodity CRB Index, consisting of 19 commodities.
Curmudgeon Note: A survey of other views on commodities is contained in a Forbes article titled: Investment Banks Divided Over The Outlook For Commodities After A Strong Recovery.
US Dollar and GDP: Lets watch if the dollar index (DXY) stays above 92 (its recent low reached this past May). That would keep the yield curve flat and implies the economy will also be flat after 9/30/2016. 3rd quarter GDP will be in the ~2%+ range, helped by government spending and inventory stocking for Christmas.
Victor: Fed Meeting a Dud!
The Fed concluded the most unique meeting I have ever heard about this past week. Academy Award "double talk," mixed with confusing rhetoric, and nonsensical forecasting never seen before in the history of the Fed. The dollar declined this week after the Fed did NOT raise rates (stock prices rallied as the Curmudgeon notes below). The Fed will certainly not raise rates till after the US elections and maybe not even in December.
The Dot Plot" of Fed Funds is projected higher, while GDP growth trends lower.
Indeed, the Fed lowered its own forecast for 2016 GDP growth from 2% to 1.8% on Wednesday. The Fed also lowered inflation, using the PCE deflator, which is projected under their target of 2% all the way out to 2018! The Atlanta Fed is projecting 2.9% GDP growth in the 3rd Quarter, ratcheted down from 3.8% in July. The Atlanta Fed is still respected as the Hot Hand in macro-economic forecasting.
Curmudgeon Note: The Curmudgeon has stubbornly claimed that the Fed has lost all credibility by talking tough in between meetings then doing nothing at the meetings other than Chairwoman Yellen saying: the case for a rate rise has strengthened. We compared that to the boy who cried wolf in a recent post.
Its amazing the markets react in a strong risk on mode after every Fed do nothing meeting ends. Its as if they were expecting a rate rise which doesnt occur, despite the consensus for same being negligible. For example, 90% of respondents to a CNBC Fed Survey, said the Federal Reserve wouldn't increase interest rates at its September meeting which ended on Wednesday afternoon. Other analyst/economist forecasts and the CME Fed Watch Tool agreed no Fed rate hike in September! Yet US stocks rallied strongly after the Fed announced it didnt raise rates on Wednesday and popped again on Thursday of this week. Both the NASDAQ and NASDAQ 100 indexes made all time new highs. Its as if the markets were celebrating what was already discounted (if you believe the market is a discounting mechanism, which I dont)!
US Dollar Point of Order (Victor):
Jim Rickards projects a steep dollar decline/crash on 9/30-10/1/2016 due to China coming into the IMF reserve currency basket on that date. Rickards is now also predicting Russias Putin launching a currency attack on America.
I don't see a dollar crash coming, but I hope he is correct. If it does happen, it would cause a huge commodity rally.
Citis Look Ahead: Post-FOMC data flow crucial for next hike:
· The September FOMC statement looked through the dive in ISM non-manufacturing and the weakness in the most recent hard data and concentrated on stronger underlying trends. The onus on incoming data will be to confirm that these more positive trends remain in place.
· Next weeks data may bring little comfort to those looking for signs that recent weakness is an aberration. We see further downside risk to consensus estimates for a contraction in durable goods orders.
· A large number of Fed officials speak next week. Most notable are Fed President Evans, who may or may not wish to hike rates this year, and Presidents Harker and Kaplan who become voters next year.
· Next week the political calendar also heats up with the first of several Presidential debates and a major budget deadline for Congress. The stakes are high as recent polling has shown a much tighter race. With the September 30th close of the 2016 fiscal year and no budget, Congress and the Administration will pass emergency legislation to fund the Federal Government until Congress reconvenes after the election.
· Plans for a December rate hike remain intact for most FOMC members and this remains our baseline expectation. The onus on incoming data will be to confirm that these more positive trends remain in place. Against this backdrop, downside misses to forecasts, which would fit with the narrative of slowing activity, may provoke more of a market reaction than upside surprises.
Excerpt of SoGens Albert Edwards Global Strategy Weekly: Disgraceful, disgusting and dangerous
Recent anemic economic data in the euro-zone confirms what we already knew from the US, QE is not the panacea for slow growth. Some 18 months and 1 trillion later, the euro-zone remains in the doldrums. More concerning perhaps is that the potential' GDP growth rate has slumped over the past decade or so. Angela Merkel may have issued a mea culpa' for the lack of preparedness of the German authorities last year in accepting one million refugees, but what has not changed is the economic thinking that her open door migration policy should boost Germany's low potential growth rate via population expansion. This policy will fail however, as it will in much of euro-zone if policymakers do not address the disturbing lack of opportunity that migrants face there-something not seen in either the UK or US.
Policymakers and investors have noted how potential GDP growth rates in virtually all developed countries have slumped over the past decade with declining productivity growth being seen as the main culprit. This is seen as a long-term, complex and intractable problem, which is not readily open to policy solutions.
Victors Conclusion and End Quote:
Commodities are stagnant along with inflation. The Fed wishes for 2%, but it never seems to reach that target. The problem is fiscal policy, but Yellen wishes for the price rise anyway, and it never comes. She should read Jack Welch:
"Face reality as it is, not as it was, or as you wish it to be." Jack Welch
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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