Equities Fall On Potential Rate Increase From Fed May 27, 2015
Markets Have “Holy Crap The Fed IS Going To Raise Rates” Moment
Yesterdays move in equities along with the USD strength can really mean only one thing and that is that they are really starting to believe the Fed is going to raise rates sometime this year. To be honest I am having to rethink my perspective as well. Although a look at the big picture still shows that they really cant raise rates I have to admit that they do seem determined to do so regardless of the potential unforseen consequences. Having said that I will repeat what I said in yesterdays live London session. In reality they should have raised rates long ago and let the cards fall where they may. In what seems to have been a time buying act to give the government some room to make the necessary reforms to get the economy rolling the actions from the Fed have essentially made things worse because doing the right thing from the politcal view is not an option. Going back to the famous J C Juncker statement of “we know what we need to do but dont know how to do it and keep our jobs”. At this point I can only hope that the Fed will have the nerve to do the right thing considering that there cant be any real change until most all the cronies in the government are gone. I think Peter Schiff said it best even though hes not convinced they are going to do it, the premise that now they are ready to go full blown China and manipulate every figure in favor of rate increases says quite a bit. Below is his view.
When Steve Liesman pressed the Bureau of Economic Analysis (the government entity that supplies the data) to explain his findings, the agency responded “BEA is currently examining possible residual seasonality in several series, which may lead to improvements in…the regular annual revision to GDP.” We should understand “improvements” to mean changes that make first quarter GDP higher.
As if on cue, the Federal Reserve itself waded into the debate with its own new study (released by the San Francisco Fed – Janet Yellen’s former stomping grounds) that seemed to confirm and expand on Liesman’s analysis and the BEA’s concessions (makes one wonder if these campaigns are coordinated). Fed economists took a hard look at the disappointing .2% annualized first quarter 2015 growth, and determined that the seasonal adjustments that have been in use for years were insufficient to fully reveal the true health of the economy. When the San Francisco Fed added a second level of seasonal adjustments, it determined that Q1 growth should have been measured at 1.8% annualized. While that growth rate would not be considered strong, it is much closer to the 2.7%-3.0% that most forecasters had predicted at the end of 2014. No matter that the Atlanta Fed’s “GDP Now,” which was designed to be a more objective and contemporaneous measurement tool, was confirming near zero growth in Q1, many economists and media outlets jumped on the Fed study as proof positive that the economy is stronger than the pessimists portray.
People understand that holiday spending juices GDP at the end of the year, and that post-holiday depletion and cold winters cause consumers to retrench. This causes them to try to compensate for the weakness in the first quarter. But there is no pressure for them to find reasons that GDP may be too high in December and May (when Christmas lists and pleasant weather should be encouraging shopping).
Given that, why do we really need seasonal adjustments in the first place? Yes December is different from July, but those differences persist every year. If we are looking at full year GDP, which is the measure that everyone is really after, why not keep a cumulative tally that we compare to prior years rather than prior quarters? Wouldn’t this strip out a needless and opaque system of adjustments from a measurement system that is already overly complex to begin with? I believe the truth is the system is getting more complex because we want it that way. We prefer the ability to manipulate figures rather than allowing the figures to tell us things that we don’t want to hear.
In any event, many market watchers are grabbing at the San Francisco Fed report to conclude that Janet Yellen will raise rates this year, despite the weakness that the unadjusted GDP reports indicate. Such a conclusion is premature. I believe that the Fed wants us to think that the economy is strong, in the hopes that perception may one day soon become reality. If people think the economy is strong their optimism could influence their spending, hiring, and investing decision. As a result, optimistic Fed pronouncements should be considered just another policy tool; call it “open mouth operations.” But I do not believe the Fed has any actual intention of delivering the rate increases that it may expect will damage our already weak economy.
That last paragraph is where I hope he is wrong. After all the Fed has done using every tool it has my hopes are that they are fed up with being the top player for backa$$wards politicians having enriched themselves through the crisis rather than do whats right by the people and make the changes necessary to get the economy rolling. Yes that may be a bit too optimistic and I understand that, however I will never give up hope.
EUR/USD Lower On USD Strength
The conviction on the EUR/USD yesterday proved to be true during the London session giving a nice Confirmation Entry at the beginning of the NY session for a nice 50+ pip continuation trade. Good job to those that caught that trade.
With the pushes not all that clear I will be open for a long today while slightly more bias for the short. If they really think the Fed is going to raise rates this USD strength should continue. The best level to short will be around the Asian highs of 1.0891 but if they cant widen the range this morning the probability of a test up to 1.0933 goes up. The exception would be if price leaves the Asian box at the lows. At that point running stops and breakout traders to the Asian highs should suffice. I will only consider a long from a stop run to the lows and a screaming at me type of set up.
GBP/USD Drops With EU Showing USD Strength
The GBP/USD dropping in step with the EU along with the daily close beyond a less significant daily low suggests the next long term test will be down toward 1.5165 or even this months lows. Again the pushes are questionable so I will be open for the long while mainly bias short considering most of the info available is bearish. The best level I see for a short is up at 1.5412 but if they widen the range lower and leave the Asian box at the lows the Asian highs around 1.5400 are more probable for a good set up.
EUR/JPY “Houston We Have A Problem”
The EUR/JPY is in a conundrum these days moving with either the Euro or USD. Yes that seems funny if not outright weird but after thinking about the cause this morning it actually makes sense and this is likely what will be known as the “new risk off trade”. Typically during a risk off scenario we see the USD strengthen while the Yen also does the same and we get the extended move from the EUR/JPY. Well if we think of the cause its due to investors going from higher risk assets to lower risk ones. However since the BOJ is not only buying up every Japanese bond issued but also buying ETFs it only makes sense that there are no JPGs to buy in a risk aversion move so the EJ will follow the UJ in such situations and track the EU when the Euro is just plain weak. Welcome to the new normal once again.
Considering the push I will be bias for the push up today but will need to see that the UJ is dragging it along like it has so far this morning. The best level is at 133.68 but if they show conviction above 133.98 and push off far enough I will look for the continuation trade to the upside from there. Its possible they will push back down considering the rejection but I will need to see them moving with the EU.
Forex News Today
The calendar is rather dead today with only German GFk Consumer Climate before London opens. Expected to drop slightly a bigger disappointment should get more Euro weakness while an improvement should only get a subdued move considering all the issues in Europe these days.
The NY session only has the Canadian interest rate decision for all the Loonie traders to watch.
Tomorrow during Asia there is Japan Retail sales to keep an eye on but I doubt its going to do much.
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