With summer vacation season winding down and the Fed's symposium getting underway in Jackson Hole, it is safe to say that those traders at their desks this week are waiting to hear what Janet Yellen has to say on Friday before making any major commitments here.
To review, Ms. Yellen is scheduled to speak to the gang of central bankers gathered in the mountains of Wyoming at the end of the week. And while we can't be sure that the Fed Chair is going to discuss her views on when the FOMC will take action again on interest rates, the annual meeting in Jackson Hole has been the spot where changes in monetary policy have been introduced. As such, traders of all shapes and sizes will be hanging on every word Ms. Yellen utters on Friday.
At issue is the potential for the Fed to raise rates in September and/or December. Given that the Fed does not like to make changes to monetary policy in front of a national election, the thinking is that Ms. Yellen has to either take action next month or wait until December to make the first move in 2016.
To be sure, there have been ample opportunities to raise rates so far this year. But each and every time there has been a reason not to. The most recent excuse was the BREXIT vote. With the bears telling anyone who would listen that the UK's decision to leave the EU would undoubtedly trigger the next global crisis, Yellen & Co. decided to stay on the sidelines and err on the side of caution.
However, the FOMC has made it very clear that it remains "data dependent" in terms of when it will take action. And the bottom line is the data would seem to suggest that it's time to quit pussyfooting around.
Fed Vice Chair Stanley Fischer basically said as much over the weekend when he suggested that both the labor market and the level of inflation were close to the Fed's targets. And for those keeping score at home, this marked the third such "hawkish" statement from Fed Governors recently. Thus, it would appear that the call from within the FOMC to get on with the show is growing louder.
At the same time, we must keep in mind that Ms. Yellen is an uber-dove and as such, may not want to upset the apple cart at this point in time. After all, the Fed Chairman has a long history of whispering sweet nothings into the market's ear. And from a big-picture standpoint, this has put the credibility of the Fed in question.
Here's the point. Market expectations are for no hike in September and about a 50/50 chance for rates to rise in December. So, if Ms. Yellen wants the world to know that these expectations may be off, she will talk about September being a "live" meeting on Friday. And while no one really expects rates to move up next month, this type of mildly hawkish talk would act as a message to the markets to expect an increase in December.
From my seat, the idea is to "gently" change the market's view and to give traders time to accept the fact that rates are going to rise. Heck, it's time and everybody knows it. However, anybody who has been in this business a while knows that markets don't like surprises. Thus, Janet Yellen's primary job this week is to get traders to accept the fact that rate hikes are coming and that there is nothing to fear.
Publishing Note: I am traveling the rest of this week with a couple very early meetings. Thus, reports will be published as my schedule permits.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Global Central Bank Policies
2. The State of U.S. Economic Growth
3. The State of Oil Prices
Thought For The Day:
I hear and I forget. I see and I remember. I do and I understand. -Confucius
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
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