Where’s the Data? & Would You Place This Trade?
- First and foremost – The Fed is data dependent – Where’s the “data” that warrants a rate hike right now?
- The Fed has a dual mandate (help the economy/jobs and keep inflation near 2%). Right now neither one of their mandates are being met so why would they raise rates next week?
- The Global economy remains lackluster at best and is slowing (even with rates at zero)
- Japan, Canada, Australia (major trading partners) are already in a recession
- Commodities are in a bear market (forecasting a recession)
- Transportation stocks are in correction territory (forecasting a recession)
- Deflation remains more of a threat than inflation – across the globe (even with rates at zero)
- The IMF and other important economic entities have publicly asked the Fed not to raise rates in 2015
- The Fed has placed the perfect hedge by saying they are data dependent. We’ll raise rates when the data improves… But if the data gets worse – we are open to either A. Not raising rates or B. Printing more money (QE 4) to stimulate both Main St and Wall Street…
- Risk/Reward: What’s their downside to waiting? Inflation? Doubtful… On a simple risk/reward basis- the “data” suggests the upside to waiting greatly outweighs the downside. Especially given the “bearish” action we are seeing in so many asset classes.
1. The Fed does nothing and stocks rally because easy money is here to stay.2. The Fed raises rates by a quarter point (which is really symbolic in nature) and stocks rally because that is already “priced in.” Meaning, late August’s sell-off priced in a Fed hike.
We don’t believe the Fed will raise next week but of course we are open and know anything is possible. In the short term, the next level of support is 1867 in the S&P 500 and the next level of resistance is 1993. By definition, until either level is breached we expect this sideways action to continue. To be clear, if 1867 is broken, we expect another big leg lower to follow.