Registered Investment Adviser Caleb Lawrence
The Major averages struggle to begin the week after Friday’s tech meltdown, that continues today though in a much milder form. All eyes will be focused on The Federal Open Market Committee Meeting or FOMC decision on interest rates due Wednesday. Despite weak economic data that has deteriorated of late the consensus fully expects the Fed to hike by ¼% at the conclusion of this week’s meeting. Given that market or effective interest rates have steadily declined since about the beginning of the year based on 2 and 10-year Treasury’s the market is unconvinced with respect to the Fed’s tightening intentions. With persistently weak economic data I can’t say as I’m convinced by the whole tightening thesis either. Particularly when one considers the significant crash in oil prices beginning in late 2015. Sharply negative interest rate swap spreads are another indication that all is not well or as rosy as the mainstream media presents. Lastly the persistently sub 5% unemployment rate and lack of meaningful wage gains indicates that the labor market isn’t anywhere near as strong as advertised. Another item on the FOMC agenda is the decision to begin tapering the Fed’s bloated balance sheet following years of Quantitative Easing or QE in the post bust period since 2008. Many view the tapering process as of much greater significance particularly with respect to the financial markets as theses central banks have purchased 1.5 trillion in various securities in the first 4-months of this year based on data from Merrill Lynch and Bloomberg and including the Federal Reserve, Bank of England, European Central Bank, Bank of Japan, and the Swiss National Bank. This pushed the combined balance sheets to a not insignificant 15.1 Trillion Dollars as these 5 banks inject some 300 billion per month into the financial markets. Data from Deutsche Bank shows that most of the QE heavy lifting in the last couple of years has come from the Bank of Japan and the European Central Bank. Oddly enough as balance sheets have grown their trajectory more or less mirrors the gains seen in more than a few markets. Given the weak macroeconomic and earnings data I can’t say as I’m really surprised.