What to Expect from Fed Statement
Here is some food for thought ahead of Wednesday's FOMC Policy Statement:
- In that my intermediate-term S&P 500 (SPX) work argues for a forthcoming correction, and that my longer term VIX work indicates conditions "friendly" to a rally in the VIX (decline in SPX), what might have to happen in reaction to the FOMC Policy Statement on Wednesday for such a scenario to unfold?
- If the FOMC statement remains unchanged -- that is, the Fed is unlikely to raise rates again for months, and maybe not until 2017 -- that probably will not trigger an equity market sell-off. Not unless the statement becomes a sell-the-news "opportunity," which represents a buy-the-easy-money dip within a still central bank-supported equity market staring right at its May 2015 all time highs.
- If the FOMC tweaks its statement and shifts a bit away from more accommodation -- and back towards implying that the economy is stronger than we think and that a rate hike (normalization) is still on the table during the rest of 2016 -- then the result could very well be a knee-jerk reaction to exit the equity indices atop an exhausted 16% advance since early Feb.
- But what about inflation, or the lack of it? If the Fed's focus has shifted from a strong labor market, a target that Yellen & Company believes it has met, then The Committee likely will turn its attention to creating some inflation. Then again, Oil has climbed to $44 from $26, which could be considered inflationary, no? That said, in general the commodity markets remain under duress, especially in the beleaguered Emerging Markets, while growth prospects in China are tenuous at best (notwithstanding GS upgrade of CAT largely because it believes China is recovering). Where does this leave the Fed? Does Yellen continue to err on the side of caution and stimulus?
- Remember the lunch at the White House a couple of weeks ago between Obama, Biden, and Yellen? We have to suspect that the incumbents used all the persuasion at their disposal to impress upon the Fed Chair to continue to err on the side of accommodation -- at least for the next several months -- to ensure Hillary's ascendancy, and to avert upsetting Obama's legacy
Bottom Line: From my perspective, based on negative and/or roll-over set ups in equities, Treasuries, and the US Dollar, whatever Yellen states on Wednesday will unfold to weaken the US Dollar, pop the commodity markets, undermine bonds, and create a sell-the-news situation in equities.