Tuesday, June 16, 2015

NASDAQ marks time waiting for the Fed

I would not read anything into what the market does today or tomorrow or even the rest of the week since the main name of the game this week is waiting for the Fed to speak tomorrow afternoon. In truth, we have all the data we need to gain a ballpark assessment of what the Fed will say. Sure, we'll get some details and some color from the FOMC announcement and press conference tomorrow afternoon, but the result will be essentially the same, namely, that the Fed will likely begin raising their interest rates sometime in the fall and that the economy will gradually pick up and bounce back even as there remain challenges. And, the rise of Fed interest rates will be gradual so as to not disrupt the economy or markets. Sure, analysts and pundits will over-parse every word from the Fed, but that won't change the overall picture one iota.

September vs. October vs. December vs. January for the first Fed rate hike? As the Fed has said, it will all depend on the data, which we won't have until August, September, November, and December. Sure, we can all guess what the data will be, and the futures market is a great place to do that, but over-obsessing and over-analyzing an uncertain future achieves no productive purpose. Place your bets and then move on. Me, personally, I remain semi-confident that October will be the most likely time frame for liftoff and the Fed rate will be roughly 1.00% a year from now. Sure, the economy could be stronger or weaker than expected, but only when that unexpected possibility becomes a visible reality would it matter.

One last factor to keep in mind is that the Fed will always tend to be much more deliberative and much more cautious than the wild west gunslinger economists on Wall Street. The admonition of the Fed being behind the curve sounds like a negative, but it is the reality of the nature of the Fed's deliberative nature. Economists on Wall Street may be ready for a Fed hike in September, and they may be absolutely correct that September would be the best moment for liftoff, but the Fed has a different role than the gunslingers - the Fed needs to add an extra level of deliberation and and extra level of certainty to the process. By design, the Fed will always tend to be behind the curve. This time will be no different. In truth, history will probably end up showing that June would have been the optimal time for liftoff, but that is not to deny the role and value of the Fed's more deliberative process.

Greece? Still a sideshow, as it always was and always will be, but traders are always happy to reach for even the slimmest wisp of news to cover for underlying trades that they wish to engineer. Greece and Europe are engaged in a predictable dance of political theater. The fix is in. A deal will get done. But neither side can be seen publicly as admitting to having to compromise. So, they both just wait for the clock to run out and then grudgingly make the deal at the eleventh hour. A key factor here is that the Greek people need to see that their leaders went to the wall fighting for better terms. That perceived persistence will give the Greek politicians political cover for the unpalatable compromises that will result in the coming eleventh hour deal. And Europe will be forced to accept the ugly reality that they will be unable to force Greece to completely bend to its will.

Meanwhile, NASDAQ futures are down only moderately, recovering from earlier moderately sharp losses, indicating another moderate pullback at the open, but as always we must caution that futures and the opening move are frequently not reliable indicators of the market trajectory for the rest of the day. Flip a coin whether NASDAQ ends down or up for the day. We could see a sell-off in advance of the Fed tomorrow, or we could see a rally if people feel that the market feels a bit oversold. Whatever happens today, expect a reversal within days, so that a week from now we will probably be right where we are now, give or take 75 points.

Fed funds futures are now pointing to December as the most likely time frame for Fed rate liftoff, with October at less than a coin-flip chance for liftoff (47%) and September only a 26% chance for liftoff. Futures point to a second hike in January and a coin-flip for a third hike to 1.00% in April. October keeps hopping on and off the table based on whether the latest data report is warm or cool. October still feels right to me. The economy remains too mediocre for an earlier move, and only deeper weakness would derail an October move.

-- Jack Krupansky

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