Category Archives: Federal Reserve

Federal Reserve areas of interest are interest rates and quantitative easing.

What’s up Here??? Part 2

On 9/2/2016 I make a post about bad economic numbers driving the market higher that day. That big day was caused by the market precipitants relief that this relieved pressure for an interest rate increase by the FED.

On Wednesday,  9/7/2016 the FED concluded a two day policy meeting in which they voted for no interest rate increase, as expected. On Thursday a couple of interest rate hawks who are members of the FED spoke out and opined that the economy had strengthened  and inflation was rising. These are two major factors that determine a raise in interest rates. They said, or inferred, that a rate increase was overdue. Even though they are non-voting members of the FED these prognostications scared the crap out of market precipitants, ie banks, hedge funds and other large money managers. These are the folks that move the markets.

blog-indu-60m-2-9-2016

The chart above shows us a 394.46 point decline in the market (Dow Jones Industrial Average) on Friday, 9/7/2016.

When I looked at the CME FED Watch Tool on Friday the expectation of a rate in September had moved up from 15 percent to 76 percent. These are the expectations and these are the numbers the market trades on.

Personally I don’t think there will be a rate increase before the election in November because of the effect it would have on the election. I would certainly look at such a move as an attempt to manipulate the result of that election.

For those of you who might have been in doubt about the effect of interest rates, or the expectation of a change in interest rates, you can now lay that thought aside.

Dave C

What’s up here???

08:31
July Trade Balance -$39.5 bln vs -$43.0 bln Briefing.com consensus
08:30
August Average Workweek 34.3 vs 34.5 Briefing.com consensus
08:30
August Unemployment Rate 4.9% vs 4.8% Briefing.com consensus
08:30
August Nonfarm Private Payrolls 126K vs 175K Briefing.com consensus
08:30
August Nonfarm Payrolls 151K vs 180K Briefing.com consensus; Prior revised to 275K from 255K
08:30
August Average Hourly Earnings M/M +0.1% vs +0.2% Briefing.com consensus

Courtesy of Briefing.com

With the exception of the July Trade Balance all these numbers are bad.

Below is a chart of the SPY pre-market movement this morning.

blog spy 5m 9-2-2016

The large (huge) candlestick at seven thirty CDT occurred when the reports came out.

Let’s start with the fact that expected consensus numbers are what the market reaction is keyed to.

Average Workweek came in at 34.3 versus consensus of 34.5.

Unemployment rate was 4.9 versus consensus of 4.8.

Nonfarm Private Payrolls were 126K versus175K.

Nonfarm Payrolls were 151 versus consensus of 180.

Average Hourly Earnings Month over Month were 0.01 versus consensus of 0.02.

All were worse than expected. So why the big rise in the market?

Remember all the chatter from the FED (Federal Reserve) and their various governors in the last month or so about finally pushing through an interest rate hike. This had become the consensus of the market. Things were looking up and a rate hike was long overdue. As most of you know higher interest rates are a drag on a higher market because of the higher cost of borrowing money which raises the cost of doing business.

The report this morning sharply reduced the chances of an interest rate hike in the near future. The change in expectations is the reason the market popped 120 points this morning.

Dave C

 

The Fed

The Federal Reserve is the central banking system of the United States. They were established in 1913 in response to a huge financial panic in 1907.

During my lifetime their primary concern was inflation. In 2008 they were assigned two new areas of responsibility, they were the markets and unemployment.

In December of 2008 Quantitative Easing started.

November 2008

Fed unveils $800 billion plan to bolster lending, housing

March 2009

Federal Reserve to buy $300 billion in longer-term Treasury bonds

November 2010

Federal Reserve to buy $600 billion in bonds

September 2011

Federal Reserve moves to lower interest rates on consumer loans with a $400 billion debt-swap program

June 2012

Fed extends ‘Operation Twist’

December 2012

Fed to launch QE3 by buying mortgage securities

May 2013

Bernanke tells Congress ‘step down’ in QE could come soon

September 2013

Fed decides not to taper

 

The Dow Jones dropped into the 6500’s and unemployment went over 10 percent before QE was started. Since inception, bank to bank overnight rates are one quarter of one percent or less. Unemployment has fallen under 6 percent and the Dow Jones Index is over 18000.Our national debt is now over 18 trillion and that doesn’t include the 6 trillion the Fed used to buy our own debt.

When the money stops, the market drops. In the last six years we have not had a single 10 percent correction. The reason is the continuing influx of money from the Fed. We did have a 7 or 8 percent correction when the Fed said they would slow or stop QE in 2014.

The point I am trying to make here is that you, the little guy with a few thousand bucks in the market, need to be paying attention to the Federal Reserve. If you don’t the big guys will get your money, again.

The way they do that is by reading the market, the same thing you can do, and then going short, which you can’t do in a IRA or 401k.

There’s a whole lot more to this thread.

Stay tuned.

Dave Cappaert