What a long, strange trip it’s been
I am often reminded of those immortal words penned by lyricist Robert Hunter for The Grateful Dead every time we get an FOMC meeting on the calendar. Unlike the classic Dead song “Truckin',” however, I don’t think this long, strange trip will be ending anytime soon.
When the FOMC undoubtedly announces this Wednesday that they will hold the federal funds target rate steady at 0.50%, it will prolong one of the longest low interest rate periods in our country’s financial history. The fed funds futures now show a 0% chance of the Fed moving at the meeting this week.
Indeed, the percentages for a raise in June and later in the year have also come down recently so that the majority of bettors have now concluded that there will only be one more rate increase this year and that it will come in December.
Another reason why it seems likely that nothing will be done by the Fed at least until the back half of this year is the British EU referendum on June 23. Even a modest rate increase in April or June would be mildly chaotic to the markets, but one done as a prelude to a British exit to the EU would likely create panic.
Mario Draghi just did Janet Yellen a huge favor
Interestingly, and conversely to the bets, Mario Draghi’s comments in the last week that he and his colleagues will wait to analyze the impact of existing stimulus before layering on additional measures, has given Janet Yellen a little space to maneuver.
Eurodollar rallied on those comments, so if the Fed does move either this week or later this year, it should not push the dollar up to a point to negatively impact U.S. companies. Will that cover be enough to see a raise on Wednesday or in June? That’s doubtful, but if the perceived notion that the ECB may be done for awhile becomes reality, then we should see fed funds futures shift a bit toward that increase coming earlier than December.
Even still, go with the smart money on this one. The long, strange trip will be even longer.
Markets are at a key inflection point …
The price action over the last few days has gotten the markets to a key point. The fact that this alignment is occurring during Fed week raises some interesting potential outcomes. With the major indexes situated just below strong overhead resistance levels, it’s likely that the markets will move sideways for a time before the next significant move begins.
Negative factors to consider include: (1) overhead resistance in oil which has been positively correlated to equities, (2) bullish seasonality is now ebbing and will continue to do so into June (just in time for the next FOMC meeting), (3) very low volatility which tends to indicate a short term top, and (4) short term investor bullishness.
While the outlook is sideways, the market will probably have to submit to these negative influences with a minor pullback before a move meaningfully higher can occur. Look for a shift in ETF flows and a sustained rise in the VIX toward 20 to determine if that minor pullback is in motion.
I don’t expect much in the market until we get the FOMC statement. And, even after that, we could glide into the weekend. After all, “Sell in May, and go away” is almost upon us!