In the note below, Chief Market Strategist Brett Ewing of First Franklin reacts to today’s Fed announcement saying, “The last gasp for monetary doves may come from a very predictable source—a presidential election with less than desirable candidates…”
He further says, “We reiterate that regardless of the presidential outcome, fiscal spending is here and inflation is coming, further evidenced by the month of October being the worst for global bonds in over three years.”
Never before has a Federal Reserve (Fed) meeting been considered to be so non-eventful just one month prior to what is widely viewed to be the first rate hike in a year. The Fed will also be dealing with speaking to a market that ended October in a slump, down five of the past six days, and currently sitting at three month lows.
[drizzle]Normally, all this would be cause for concern, but this Fed is being increasingly pushed into the rate hike corner, spurred on by increasingly positive economic numbers. The latest GDP print and the recent wage growth numbers have spurred a spike in long term yields as inflation begins to settle in to the economy and threaten the Fed’s ever present excuses to raise rates in 2016.
The last gasp for monetary doves may come from a very predictable source—a presidential election with less than desirable candidates looms—turmoil and uncertainty abound as the result has gone from a foregone conclusion a month ago, to unknown and ripe with potential legal trouble today.
The Mexican Peso falling like a rock and biotech beginning to outperform are telltale signs that a Trump presidency is becoming more and more likely as apparent Clinton legal troubles become more and more legit.
While it is unlikely, it isn’t hard to see a situation where the stock market sells off into and out of a murky and unpopular election, which would give Fed officials yet another chance to do what they prefer to do and avoid raising rates yet again in December.
If this scenario did occur, a widening of the yield curve would almost certainly be the result as the short end would be held down by the fed funds rate. But the long end prices would result in even more inflation because of fiscally expansionary policies like tax cuts and infrastructure spending, which Trump has championed.
We believe the weakness in the U.S. dollar over the past week has been egged on by the increasing odds for a Trump presidency and his willingness to make an extreme addition to fiscal policy expansion.
What’s interesting about this situation is that it lines up with our previous thoughts about the U.S. entering the late stages of the economic recovery. In this stage, cyclicals and basic materials should continue to outperform as inflation and wage hikes continue to push up spending
We reiterate that regardless of the presidential outcome, fiscal spending is here and inflation is coming, further evidenced by the month of October being the worst for global bonds in over three years.
Watch for continued correlation changes in relationships between the dollar, bonds, and stocks as proof we are headed into a different phase of the economic cycle where allocation shifts become prudent and meaningful.
Securities and advisory services offered through Centaurus Financial, Inc., member FINRA and SIPC, a registered investment advisor. Centaurus Financial, Inc. and First Franklin Financial Services are not affiliated companies. This presentation is for educational purposes only and is not intended for investment advice or a solicitation of services.
Article by Chief Market Strategist Brett Ewing of First Franklin
In the note below, Chief Economist at Stifel Fixed Income, Lindsey Piegza, offers her insight into the FOMC announcement today.
She says, “the Fed has positioned itself to continue with a removal of accommodation in December, reinforcing the pattern of one rate hike per year as the economy continues to “recover.'”
Fed Holds Rates Steady, Keeps a December Hike an Option
As expected, the Fed opted to leave rates unchanged in today’s policy announcement, maintaining a range of 0.25-0.50% and bypassing now the seventh consecutive meeting since liftoff last December.
Bottom Line: The Fed appears increasingly optimistic regarding the pace of expansion in the second half of the year, despite extreme weakness early on, particularly on the inflation side as market-based measures of inflation compensation have “moved up.” While a move in December was not explicitly communicated, the Fed has been talking up a near-term rate increase with gusto amid perceived “improvement” in the U.S. economy, a positive assessment reiterated in today’s statement language noting the case for a rate hike has “continued to strengthen.”
Is such an optimistic assessment warranted by the Fed? With the economy growing less than 2%, consumers under pressure amid declining income growth, business investment negative for nearly two years, and inflation sluggishly low, many – ourselves included – would argue “no.” But like most things in life, it’s all relative. And for the Fed, the apparent “improvement” from extreme weakness earlier in the year is good enough to suggest a continued progression of growth going forward, despite lingering trends pointing in the opposite direction.
At this point, however, a discussion about whether or not it is appropriate to raise rates given the still lingering fragility in the U.S. economy appears moot; the tone of the November statement suggests, barring a significant indication of pronounced economic weakness, i.e. an economic shock, or a severe market reaction following the presidential election, the Fed has positioned itself to continue with a removal of accommodation in December, reinforcing the pattern of one rate hike per year as the economy continues to “recover.”
Full Document Upon Request
This material is prepared by the Fixed Income Strategy Department of Stifel Nicolaus & Co (“Stifel”). This material is for informational purposes only and is not an offer or solicitation to purchase or sell any security or instrument or to participate in any trading strategy discussed herein. The information contained is taken from sources believed to be reliable, but is not guaranteed by Stifel as to accuracy or completeness. The opinions expressed are those of the Fixed Income Strategy Department and may differ from those of the Fixed Income Research Department or other departments that produce similar material and are current as of the date of this publication and are subject to change without notice. Past performance is not necessarily a guide to future performance. Stifel does not provide accounting; tax or legal advice and clients are advised to consult with their accounting, tax or legal advisors prior to making any investment decision. Additional Information Available Upon Request.
Stifel Nicolaus & Co is a broker-dealer registered with the United States Securities and Exchange Commission and is a member FINRA, NYSE & SIPC. © 2016
Article by Lindsey Piegza, Chief Economist at Stifel Fixed Income