Bulls Charge Into Economic Slowdown

 

Last weekend, we discussed the two things driving the markets currently:

“The first is the Fed.

As we discussed with our RIA PRO subscribers (use code PRO30 for a 30-day free trial) last week, 

“Today, [Cleveland Fed Reserve Governor Loretta Mester] all but put the kibosh on further rate hikes and, per Mester’s comments, will end balance sheet reduction (QT) in the months ahead.”

The second is “hope.”

On Friday, on headlines that talks are continuing with China, the market pushed through those resistance levels as shown below. “

It is virtually the same story during this past week.

No…wait…let me restate that.

It is EXACTLY the same story this week. 

  1. The release of the Fed minutes showed a broad consensus by the Fed to end “Quantitative Tightening” or “QT” by the end of 2019 as well as a removal of any effort to normalize the Fed’s balance sheet.
  2. The markets rallied on continued hopes of a resolution to the ongoing trade dispute between China and the U.S.

However, the Fed’s actions should actually make you question the significance of any resolution on trade. 

“Why do you say that? Everyone knows the trade dispute was a big factor in the sell-off last year?”

Maybe.

But, if that was indeed the case, then the economic turmoil should be primarily tied between the U.S. and China. However, as I discussed in “The ‘There Is No Recession In Sight’ Chartbook,” the economic disintegration has gone global.

And as David Rosenberg noted:

In other words, there is more going on globally which has very little, if anything, to do with U.S. trade wars with China. 

Which brings us back to the Fed. 

“Participants supported the removal of the hiking bias and its replacement with a sentence emphasizing a ‘patient and flexible approach.’ Participants pointed to tighter financial conditions, softer inflation, slower foreign growth, and trade policy uncertainty as justifying a patient approach to policy. However, a range of views were expressed on what adjustments to the funds rate may be appropriate later this year. ‘Several’ participants argued rates increases were necessary ‘only if’ inflation was higher than in their baseline, but ‘several’ other participants indicated that hikes would be appropriate if the economy evolved as they expected. In addition, ‘many participants noted that if ‘uncertainty abated,’ the FOMC could alter the ‘patient’ statement language.”

Why the sudden switch from hawkish” to “dovish?” Was it just the market correction that sent Jerome Powell scurrying for cover, or, despite still optimistic views on U.S. economic data, is there more to the story than they are currently saying.

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