The Fed talked a tough game yesterday about possible interest rate increases. Interest rate sensitive sectors got stampeded today threatening a possible end to the 7-year charge. We look at some key market setups and option trades for the next move...
The FOMC meeting ended yesterday as many had expected. Besides some marginal tweaks in the language, the message remained the same; data will determine our rate policy. Now, hours after the latest US GDP figures hit the newswires, it seems that Dollar Bulls are gearing up towards a September rate hike. Part of their rationale is because the data is good enough to sustain a rate hike. And that’s essentially true. With wages growing annually at 2%, Core Inflation at 1.7%, unemployment at 1.8% and now GDP bouncing back, indeed, a rate hike is warranted. At the same time, there are essentially no signs that the US economy is overheating. Rather, we’re seeing notable signs of stabilization. This, then, begs the question: How many rate hikes can the US handle in the upcoming year?
No Escape Velocity in GDP
When we examine the dynamics of GDP growth, it’s evident that the US GDP growth rate is not breaking the range. Instead, it has the same cycles that tend to end around the 3% growth rate. After that, the US economy tends to decelerate, only to regain momentum later. But this range of growth has not been broken. This means that there’s no evidence that US GDP is at escape velocity, a pace which would require several rate hikes a year.
When we examine US Core Inflation, a similar picture emerges. US inflation is within the Fed’s 2% range and is showing no signs of overheating, i.e. escaping the Fed’s target. Rather, every time it reaches the 2% range, it tends to cool and then slide slightly lower. Continue reading "How Many Rate Hikes Can The U.S. Handle?"→
The Federal Reserve's interest rate liftoff schedule for this year is slowly but surely slip slidin' away, like a space launch aborted by bad weather. It makes you wonder which government agency is directing U.S. monetary policy, the Fed or NASA.
The minutes of the Fed's June 16-17 monetary policy committee meeting released July 8 were a lot more dovish than the announcement that immediately followed the meeting. It now looks like a September rate liftoff isn't as baked in the cake as many previously believed just a few weeks ago.
Since then, of course, a lot has changed, almost all of it conspiring against an early rate increase. September is a lot less likely to happen now, and even December looks doubtful. I didn't think the Fed was courageous or confident enough to make a move this year anyway, so the events of the past few weeks make me more comfortable with that position. Continue reading "Slip Slidin' Away"→
If you haven’t heard by now, the Fed is back at it! Bud Conrad of Casey Research has written a great article on how it is affecting current markets and what to expect in the near future. Be sure to take a look and comment below with your own thoughts. For more from Bud and Casey Research click here.
The Federal Reserve recently announced important policy changes after its Federal Open Market Committee (FOMC) meeting. Here are the three most important takeaways, in its own words: Continue reading "The Fed Resumes Printing"→