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What about the September Seasonal?

By: Rissmiller, 09/01/2014

There is little question that economic risks, including geopolitical risk, remain. The conventional story is: as U.S. investors return from a long weekend, imbalances that are built up during the summer are quickly corrected, as computers are rebooted and spreadsheets run.  As we enter this weaker period seasonally for equity markets, it makes sense this phenomenon is on investors’ minds.  But, as Chris Verrone reminds us, the September seasonal is a tricky one: if the market is increasing heading into September (as it has this year), the negative seasonal is far less pronounced.

It’s not that there’s nothing to worry about.  China’s PMI fell in August, and while still in expansion territory, there will likely be more talk about the need for policy ease (with this measure close to the breakeven point).  Similarly in the euro-area, calls for ECB easing continue, especially as confidence has weakened given the events in Russia/Ukraine.  PMI measures in Europe also suggest slowing momentum.  In Japan, with the VAT tax increase reverberating through the economy, the situation is similarly uncertain.  At a minimum, the recent weakness in oil prices (*despite* geopolitical concerns) does not suggest a robust global economy.

But in places where growth has dipped, the immediate reaction is that more policy ease is needed.  The world may have a growth problem in some places, but it does not have an inflation problem in large, developed economies (which can tie the hands of policy makers).  Advantage policy-makers. 

Most powerful would be structural reform, but monetary policy is good at buying time for economic growth, and monetary+fiscal combinations have been shown to provide a boost in the short run.

Furthermore, in the U.S., the data continue to improve.  While not every data series is solid, there’s enough to give an extremely dovish Fed (ie, one that continues to pursue “emergency” monetary policy) pause.  As Strategas’ Chief Investment Strategist Jason Trennert has noted, U.S. companies with high foreign sales are underperforming.

Don Rissmiller
Strategas Research Partners


Is there a Magic Indicator for the FOMC?

By: Rissmiller, 08/24/2014

In the U.K., BoE Governor Mark Carney has tied future central bank policy to the behavior of wages.  Based on the Fed’s recent focus at Jackson Hole on the labor market, that’s key in the U.S. as well.  While there’s no “magic indicator” for the central bank, wage growth and rate hikes are tied together.
 
Fed Chair Janet Yellen is a scientist, and so will respond to the data.  That’s difficult, as she noted last week in her speech “Labor Market Dynamics and Monetary Policy”.  However, just because it’s hard doesn’t mean the Fed will back off – and it doesn’t mean that the market will stop anticipating required Fed action.  The hawks on the Fed don’t need to convince Janet Yellen they are correct to have a market impact.  The hawks just have to convince the markets they are getting more correct.
 
To be fair, with inflation readings moderate currently, there’s little need to rush to a decision at the Fed in 2014.  The U.S. CPI rose 0.1% m/m in July, and 2.0% y/y.  The core CPI also rose 0.1% m/m, and 1.9% y/y.  WTI oil fell to $94 last week.
 
But the Fed is likely to be talking about *starting* a tightening cycle soon, for the first time since 2004.  At a minimum, we’ll have further debate at the FOMC meetings.  QE additions are set to end in October.  A mid-2015 “lift-off” for rates is our base case.
 
It’s easier to talk about (eventual) Fed tightening with the U.S. leading indicator rising 0.9% m/m in July.  Additionally, housing starts & existing home sales rose in July, and the NAHB homebuilders index increased in August.  The Phil Fed index surged to 28.0 in August as well.
 
A few data-points were key around 2004 (last tightening cycle), including the acceleration in real GDP in 2003, which exceeded a 6.8% q/q annual rate in 3Q.  So, U.S output was expanding quickly.
 
But what was also key – for the Fed – was that inflation accelerated.