In the world of economic shell games, there is no greater game going one than in the world of zero borrowing cost. When the fed finally made its choice to raise interest rates, they did so in the face of a worsening global economic slowdown, and in the face of increased quantitative easing programs out of the BOJ and the ECB. The S&P 500 futures were still reeling from the August 24, 1,100 point Dow drop and a ‘limit down’ move in the S&P’s (ESH16:CME) to the 1805 low.
As the markets move into the April Fed meeting, it’s not just interest rates that will be on the minds of traders, the Nasdaq futures (NQM16:CME) have been falling for several days. Yesterday, Apple (APPL) reported its first drop in sales in 13 years, and that weakness is clear to see this morning on Globex. The futures sold off down to 2080.75,and is down 4.75 handles, 3 points off the lows as we write this. Morgan Stanley analyst Katy L. Huberty, said “While shares may take a pause near-term, we like the setup of a lower bar heading into easier compares and product cycles in the second half of the year.” Huberty has kept her overweight rating on the stock, but trimmed the price target to $120-$135. Investors have been cutting back again and we do not think it’s just the Federal Reserve policies that are bothering them. After the steep sell off in August, and another drop early in the year, many investors and traders were caught short and covering into the rally. The sharp jump and the speed of the rally made it hard to reenter and now that the S&P is back to 2100.00. Traders are worried that the S&P may do the same thing that it did on November 3rd and December 2nd when the futures traded above 2100.00 and that marked the high for the month. Over the last several Fed meeting the stock market has rallied, but the weakness in the tech sector is a big concern for the bulls, as is the end of the best six months for stocks.
While MrTopStep expects some ‘hawkish’ statements out of today’s Fed meeting, we also expect the central bank will continue to use ‘helicopter money’ to keep the economy rolling by offering some type of cash injection into US households, and the private sector, by providing tax cuts. I do not think anyone could have know what the long term prognosis for the stock market at the beginning of the credit crisis and I do not think anyone really knows what the end will look like. As long as the US, Europe and Japan continue these policies, it’s going to be hard to gauge the real strength of the markets. This brings us back to the economic ‘shell game’ that is going on. How long can it last? What will be the consequences of all the zero borrowing costs? And how much longer can it go on?
Below are the the statements from the banks this week on their expectations. We already know we live in an ever shrinking world. We already know most of the banks are under performing. How long can this go on until something big happens.
Deutsche Bank – With no press conference, all the focus will be on the tone of the associated statement. The Fed will want to leave the door open for a June hike but it’s hard to imagine that they’ll dramatically change market pricing for it. The futures contracts have nudged up to pricing a 22% probability of a June hike from as low as 14% mid-way through this month. How much this changes will likely hinge on what extent the Fed continues to acknowledge concerns about global growth and risks abroad. On the positive side the weaker US Dollar should give the Fed some confidence. We think much of the rebound in markets since early February has been due to the Fed’s about turn and re-found dovishness. This leaves them trapped in our opinion.
Societe Generale – The odds of this week’s US FOMC meeting delivering a rate hike are zero, according to Bloomberg. The chances of a cut are higher, but only 2%. What matters is the tone of the statement but the Fed has painted itself into a corner. The odds of a June hike are now down at 20% and the FOMC can’t signal a move without triggering market turmoil. A neutral/dovish message may provide a modicum of short-term comfort to markets and hold down the dollar but wouldn’t solve the problem of how to prepare markets for further policy normalization.
Rabobank – The apparent slowdown in GDP growth makes an April rate hike by the Fed even less likely than it already was. The minutes of the March meeting revealed that the possibility of an April hike was discussed already. However, recently hawks and centrists have been less vocal about an April hike. We expect the Fed to remain on hold this month, but we stick to our call of two hikes this year, most likely one in June and another in December. However, if the slowdown continues well into Q2 this could delay the first hike of this year to September.
Morgan Stanley – Janet Yellen may pay homage to other more hawkish Fed members when formulating the Fed’s statement tomorrow, but when it comes to hike or not in the summer it will pay attention to global developments too. A weakening Asia triggering rising cross border flows and a higher USD may then delay the rate hike into December. Accordingly a Fed statement leaving the door open for June may allow the USD to rally for a few days, but is not a game changer. For the USD to regain strength for good, local US conditions may have to become so strong that the Fed may have to retreat from its broadened reaction function. This is not the case yet.
Bank Of America – Markets are pricing nearly no chance of a Federal Reserve rate hike over the next few meetings, and less than one full hike by the end of the year (Chart of the day). Near-term weakness in US activity data and cautious comments from Fed Chair Janet Yellen have reinforced this view. Yet global economic and financial conditions have generally stabilized if not improved, and we expect further progress toward the Fed’s dual mandate objectives over the coming months. As a result, we think the Fed will likely hike rates again this summer, potentially in June if the global market selloff ahead of the Brexit vote is limited. Otherwise, we still see a good case for the next hike in July. Either way, we believe the Fed will have to start preparing the markets for a possible rate hike at an upcoming meeting this summer. With no press conference or forecast update at the April Federal Open Market Committee (FOMC) meeting, focus will be on the statement language. The FOMC will likely acknowledge the weak data to start the year, but contrast with expectations for continued gradual progress toward full employment and the inflation target. The Committee may note global risks have dissipated slightly, or that the disinflationary effects of the US dollar or commodity prices have started to ease. Some signal of this type could help to modestly lift the market’s assessment of rate hike likelihood. More explicit language or guidance would be more powerful, but also a low-probability outcome, in our view.
In Asia, 9 out of 11 markets closed lower (Shanghai Comp -0.37%), and In Europe, 9 out of 12 markets are trading higher this morning (DAX +0.19%). Today’s economic calendar includes MBA Mortgage Applications, International Trade in Goods, Pending Home Sales Index, EIA Petroleum Status Report, and the FOMC Meeting Announcement.
Our View: We live in an ever changing economic environment. One that is never going back to what it was. They raise the minimum wage and McDonald’s puts in computer order tellers. Most of the jobs humans performed on Wall Street have been taken over by computers. How can employment growth continue. Big and small traders alike are losing money.
Today the fed will take a pass on raising interest rates but that’s not going to last forever. How will the markets react when they start raising again? Our view is to let the selling exhaust itself and find a good spot to buy the ESM and then wait on the fed decision at 1:30. Our rule is to fade the first move after the fed headlines hit the tape. You can take it from there.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 9 out of 11 markets closed lower: Shanghai Comp -0.37%, Hang Seng -0.21%, Nikkei -0.36%
- In Europe 9 out of 12 markets are trading lower: CAC +0.10%, DAX +0.20%, FTSE -0.38% at 6:30am CT
- Fair Value: S&P -6.86, NASDAQ -7.93, Dow -79.46
- Total Volume: 1.25 mil ESM and 5.9k SPM traded
[s_static_display]
No responses yet