Waiting on the FOMC...

Today’s Pfennigfor your thoughts…

Good day.  And a Wonderful Wednesday to you! Well. This is going to be short-n-sweet today, as I am getting caught in the undertow and once I get through writing this morning, I’m heading back home! Today will be all about the FOMC Meeting results and the “forward guidance” that Fed Chair, Janet Yellen gives us.

Of course, the snarky me, would say something really mean right now. But the new, kinder, gentler me, would opt for saying that I can’t believe the markets take the “forward guidance” as seriously as they do. I mean wasn’t the “forward guidance” late last year, pointing the markets to a rate hike in June? What good did that do them?

Since today is going to be all about the FOMC and “forward guidance” I might as well, spend some time on this subject. First of all, given all the economists that work at the Fed, don’t you think just maybe there would be one, that thinks like me? That sees the same things I see?  Apparently not, for there’s never anything that comes from the Fed press conferences that sounds like reality to me.

If I were king of the forest, not queen, not duke, not prince. And I had the podium this afternoon, this is the kind of stuff I would explain to the media and the markets, so they understood completely where the Fed actually stands in real time, not make-believe land, where green shoots cover the ground.

Our economics lesson today is centered on NAIRU and why it’s important. NAIRU stands for the Non-Accelerating Inflation Rate of Unemployment.  Basically it is equal to the specific level of unemployment that exists in an economy that does not cause inflation to increase. NAIRU often represents an equilibrium between the state of the economy and the labor market.

So, what is the Fed’s NAIRU?  Ahhh grasshopper, one would have to guess at that level but it’s probably at 5%, and you might recall that the unemployment rate that the Fed uses, from the BLS I might add, is 5.5%. Think about this for a moment.  The latest PCE (Personal Consumption Expenditures) the inflation calculation that the Fed uses (as opposed to the stupid CPI), was 1.2% on an annual basis in April.

The Fed would love to have the PCE better than 2% and the Unemployment rate at their NAIRU rate of, let’s say, 5% before they would hike rates.  You can bet your sweet bippie that the Fed will not announce a rate hike this afternoon. And unless all this changes to meet the Fed’s requirements — and I have to say I doubt it will — we won’t see one in September either!

OK. So, if I were king of the forest I would explain to the markets and media that the things we look at to determine if we need to hike rates are not lining up. And unless there are some major changes it doesn’t look like they will line up any time soon. There’s your forward guidance!

Moving along… the currencies are mixed this morning with the euro, pound, franc, and rupee the currencies with gains versus the dollar. The remainder of the lot are either flat to down with the Aussie dollar (A$) the worst performer overnight.  Gold is down $3 to start the day, as gold traders still think that the Fed could pull a rabbit out of their hat and hike rates today. I guess they need to read what the king of the forest had to say about that! HA!

The price of oil has bounced back above $60, to $61.18 as I write. Apparently, crude supplies shrank by 2.9 million barrels last week marking the 7th consecutive month of falling supplies. Apparently U.S. oil producers have seen a slowdown as the rest of the world has picked up the pace. The U.S. oil producers have had to deal with lower oil prices, which means shutting down wells.  I do believe I told you that all that this was going to be the end result of the drop in the price of oil.

But a funny thing happened on the way to the forum here. Well, not funny ha-ha, just funny, strange. The price of oil bounced higher, but the petrol currencies that include: rubles, loonies, real, and krone, are not rallying alongside the rally in the price of oil. Hmmm. Maybe the bounce took the currency traders by surprise but more likely this is just a case of traders not wanting to go long in one direction ahead of the FOMC today.

No news from the Eurozone regarding the Greek Drama. So, the play goes on.  I spent most of the morning talking about Greece yesterday, so I won’t go there again, if you missed class yesterday, simply go right here!

You know sometimes I just throw my hands up and say, I give up.  And yesterday was one of those times.  Remember sequestration? Yes, it did what it was supposed to do — it took the federal budget deficit that was $1.1 trillion in 2012 and reduced the next year’s deficit by more than 50%!  Cutting deficit spending worked!  But now that it works why continue doing it?  I guess that’s the mantra that the POTUS has decided to take as he announced that he will veto any FY 2016 appropriations bill that adheres to sequestration’s limits.


Ok, ok… this is not a political letter. For if it was I wouldn’t be writing at EverBank. But in this case, we’re skating around politics, because we’re talking about debts and deficits that will once again be growing after a couple of years of cuts to spending. Shame, shame, Shame. (in my best Gomer Pyle voice!)

Monday we had a “bad data day“. And yesterday, I would say it was a “strange data day”.  “In what way, Chuck?” I hear you asking.

Well, Housing Starts fell -11.1%, but building permits rose 11.8%, both in May. Now, I ask you, isn’t that strange? Well, of course it is.  The Housing Starts data saw a HUGE drop in multi-family units (-20.2%) leading the downward direction for the overall housing starts data. While building permits and its 11.8% jump in May reached the highest level for this data since April 2007.  So, get in while interest rates are still low, seems to be the battle cry here, eh?

Today’s U.S. Data Cupboard is all about the FOMC today. The markets will be in a holding pattern until around 1 pm CT today. I can tell you right here, right now, that Janet Yellen is going to keep talking about seeing a stronger economy down the road. Which, in turn, will require higher interest rates and while the part about a stronger economy being able to deal with higher rates is true, the jury is still out on the part about seeing a stronger economy down the road. Of course “down the road” could mean next year, right?  So, every word she says this afternoon is going to be gone over with a fine tooth comb. But in the end, if she says what I think she’s going to say, the dollar will be sitting pretty once again, based on an opinion that has yet to be proven as fact.


Chuck Butler
for The Daily Reckoning

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