Whither FOMC?

BarroMetrics Views: Whither FOMC?

“Between a rock and a hard place” that’s where the FED finds itself today.

After QE having at best a marginal impact on the US economy (and if we accept ShadowStats’ numbers, no benefit), the FED finally started seeing some improvement in the job numbers and GDP (as produced by the BLS). As a result, it stopped QE and foreshadowed a possible rise in interest rates next year.

Unfortunately for the FED, the US stock market has taken a dive (Figure 1). Indeed the warning signs I spoke about (CASE sell signal and Fred AMB down US$2B) are now reflected in the price movement: we have seen a daily bearish-conviction close below the Primary Sell Zone (at 2022.23) (Figure 2). This warns that:

  • at best, the quarterly trend will change from up to down. This signal projects a move to at least the 12-month (yearly trend) line turn price – currently at 1716. And,
  • at worst, a secular bear market has started.

If we see a weekly bearish conviction close below 2011.23, this will confirm the daily’s warning.

Ideally, for the stock market, the FED will once again come to the rescue. But this week, it foreshadowed that ‘the FED does not respond to market volatility’. So, with the down moves of the past few days, the market will come face-to-face with its underlying cause for this bull run (it has been running on the belief that the FED will, and can, keep the bull run indefinitely).

Will or will not the FED come to its rescue?

The problem for the FED is its credibility. Coming to the rescue in the face of BLS’s numbers will either mean that the FED will try to prevent any stock market market downturn; or the FED does not believe in the BLS numbers. Both choices are unpalatable.

As my Singaporean  friends would say: “So how?”.

I believe that for today, the FED will try to have it both ways: it will retain the words ‘for some considerable time’ (short-term interest rates will stay near zero for a “considerable time” ); but will change its statement to imply that it will still increase rates in 2016.

It’s worth noting that:

  1. A dropping of  ‘for some considerable time’ will imply that rates are on track for a rise in 2016.This will probably send the S&P down and the US$ up. Or
  2. Maintaining ‘ ‘for some considerable time’ without any corresponding implication of a rate rise, will probably send the S&P up strongly and US$ down.

sp-13w.png

FIGURE 1 S&P 13-week  swing

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FIGURE 2 S&P 18-day swing