Will A More Aggressive Fed Spark The Long-Awaited Correction?

We have a light calendar for economic data. The week’s focus will be the FOMC policy announcement on Wednesday. Given the resilience of the market rally in the face of various natural and human threats, the punditry will turn to a favored topic. Expect people to be asking:

Will the Fed be the catalyst for a market correction?

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Last Week Recap

My expectation for last week was only partly correct. There was plenty of competing news and not much optimism about a market-friendly legislative agenda.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. Monday’s big rally was sparked by the weakening of Irma and lowered damage estimates. After some follow through on Tuesday, the market was flat for the rest of the week.

Federal Reserve

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

Personal Note

I am off next Saturday, so there might not be a WTWA post. If I can, I will do an abbreviated version, but it might be a day late.

The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. I hope that readers and past winners, listed here, will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

There was little economic news, but it was generally positive. The negatives were not very significant.

The Good

  • U.S. median income increases for the second year in a row. Christopher Matthews (Axios) has details.

  • Corporate executives remain optimistic about the economy. Avondale conference call summaries provide great context for the data we follow.
  • Initial jobless claims moved lower, despite the Harvey and Irma effects. Bespoke charts the data and New Deal Democrat shows how a hurricane adjustment makes the picture even better, 239,000. Eddy Elfenbein also weighs in.

  • JOLTs showed a solid and improving picture. The Beveridge curve and the voluntary quit rate are the key elements. Contra – New Deal Democrat questions the data.

The Bad

  • Industrial production fell 0.9%, a decline from last month’s gain of 0.4%, and missing expectations of a gain of 0.2 to 0.3%. Steven Hansen (GEI) notes the headline loss. His expected deep dive into year-over-year comparisons and unadjusted data is less discouraging.
  • Retail sales declined 0.3% compared to a prior month gain of 0.3%, which was revised down from 0.6%. Expectations were for a modest increase. Reuters attributes the decline to hurricane effects. Perhaps so, but we will have some noisy data for the next couple of months (at least).

The Ugly

Irma aftereffects. Especially the death of senior citizens in facilities that lost power.


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The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a light economic calendar. The housing data are important, but Wednesday’s FOMC decision and Chair Yellen’s press conference will take the spotlight. Other Fed participants will also hit the speaking trail after the meeting.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

There is widespread agreement (perhaps mistaken) about the role of Fed policy in current asset prices. We also have an over-supply of armchair experts on what the Fed should be doing. This comes at a time when significant market drawdowns have been few and modest. Jill Mislinski illustrates this key element of background—only two drawdowns of more than 10% in the last six years. Even North Korean missile launches have little effect in the current market.

Is this a dangerous combination, waiting for a catalyst? Expect many to be asking:

Will a more aggressive Fed spark the long-awaited correction?

The Fed is always a topic for discussion, but it reaches some higher level every six months or so. I always take a fresh look at the week ahead, but it sometimes helps to remember the history of a specific issue. Here is my summary of a discussion of Fed tightening from one year ago.

An abbreviated sequence of the week’s events:

Stock futures were set up for a flat opening, just as we had seen all week.

Boston Fed President Eric Rosengren, repeating a speech made in August, stated that gradually removing accommodation was the best way to extend the duration of the recovery. The Boston Globe states that this pushed the Dow 400 points lower.

Stock futures moved lower by about ½ of one percent when the speech was reported.

Since markets are not expecting a September rate increase, and only a 60% chance of one before the end of the year, the original move attracted a lot of discussion.

When the Dow declined a little more, CNBC started running the headline that Fed fears were slamming stocks.

Several commentators cited the possible end of the Fed support for asset prices. Art Cashin fed the fire, noting in mid-afternoon that if stocks were down 300 on just the hint, an actual increase might take them down 1000.

We might well ask what has changed. Here are the key viewpoints:

1. At last! If the Fed quits propping up the market, maybe stocks will get to the “normal” valuation. Contra – Dr. Ed Yardeni.

2. The Fed has been consistently wrong on policy. It has waited too long to raise rates, missing the best opportunity. There is no dry powder for the next recession, which may happen at any time.

3. The Fed has been consistently wrong on policy. The threatened deflation from a weak global economy is not ready

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