WWJD September 2016

What Would Janet Do????

 

+  Intro: Investors have an important week ahead as now all of their attention is centered on the FED. We also have the Bank of Japan’s Statement on the same day. On the economic calendar Building Permits, CPI and Retail Sales are scheduled to report. 

+ Fed & Rate Fears: On Wednesday 9/21, the Fed will release a statement where everybody will be waiting to see if they decide to raise rates. If the Fed does raise rates, we can expect to see significant volatility following the statement release. Some of the results of an interest rate increase include a strengthening in the US Dollar, a spike in Utilities & Financial companies, a weakening of foreign currencies, oil and metals. We would also see mortgage rates go up as Treasury yields will increase. If they decide not to raise rates, traders will look for hints as to the timing of a rate hike. A press conference will follow the announcement with FOMC Chair Janet Yellen taking questions. There is also the chance that the increase in interest rates may lower Treasury Yields as investors may see it as the US Dollar strengthening, pouring money into Treasuries lowering bond yields even further.

In this writer’s opinion, the Fed will not raise rates this time or at all this year. It should have been raised way before the first rate rise last December, which continues to punish savers, insurers and public pension funds (which of course those shortfalls end up getting made up by… you guessed it, YOU the Taxpayer.)  Economic data shows that the average US consumer will not be able to withstand an increase in interest rates. Even though inflation is staying below the Fed’s target, Core CPI is above their target which shows all of our rents and healthcare costs soaring. However these and political reasons will be the ultimate reason they do not raise rates this week.  Of course the Fed says that it is independent; it is far from it as President Obama finishes his term and doesn’t need a shock to the financial system hurting his legacy. Here is an example of how independent the FED is from a New York Times Article*:

“… in 1965, President Lyndon B. Johnson, who wanted cheap credit to finance the Vietnam War and his Great Society, summoned Fed chairman William McChesney Martin to his Texas ranch. There, after asking other officials to leave the room, Johnson reportedly shoved Martin against the wall as he demanding that the Fed once again hold down interest rates. Martin caved, the Fed printed money, and inflation kept climbing”

+ Bank of Japan: Also scheduled for a press conference on Wednesday (9/21) half a world away is the Bank of Japan. Investors are speculating that they could push interest rates even farther below zero. Any push lower could push Japanese citizens to take more money out of banks and buy physical safes as safes paying 0% interest is better than the bank paying negative rates on your money. Unfortunately, the wrong result the BOJ wants. So think of investing in companies that make safes. If investors do not feel the BOJ’s monetary easing announcement is enough to stimulate the economy, expect a market sell off. 

+ Super Mario Speaking: On Thursday 9/22) ECB President Mario Draghi is expected to speak. With the slightest chance of the FED raising rates, Draghi would potentially give his first reaction to the interest rate raise. Traders will listen for any hints as to next steps Draghi may take to strengthen the European economy. Since the ECB is going in a different direction compared to the US, it would be curious to see if he was to announce additional fiscal stimulus.    

+ Volatility: In the previous week, the VIX shot up to as high as 20 amid fears of the Fed potentially raising rates this week (taking the punch bowl away). Speculation also surrounds the presidential election as the market has factored in a Clinton victory for months now. Should her lead dwindle in the polls as we get closer to the election, we will potentially see investors stay on the sidelines or pull the money off the table sending stocks lower.

+ The Mexican Peso: On Friday (9/16), the Mexican Peso hit an all-time low against the US Dollar. Fueling this currencies weakening is Donald Trump closing in on Hillary Clinton in the election polls. Should Trump’s polling numbers increase, we should expect to see the currency weaken even further as his policies will negatively affect the Mexican economy.  

+ Recent Bombings: With the recent bombings over the weekend in New York and New Jersey, we will wait to see as to how this affects the markets. As the situation is fluid, the longer the bombings go on or the longer the suspects are not apprehended we could see a drop in the markets. 

 

 

*NY Times: America’s Endless War Over Money. Granville and Appelbaum April 7, 2015