January 27th came and went. The FOMC meeting was relatively uneventful as everyone had expected. Prior to Wednesday the market priced a zero percent chance the Fed would raise rates and at one point there was a 6 percent chance the Fed would actually lower their benchmark rate. The next meeting is on March 16th and there is a 14% chance of a rate hike (not so compelling). Also, the market is pricing in only one Fed move this entire year and only a 3.7% chance of four rate hikes for all of 2016. Let that sink in. Recall in December when the Fed raised rates for the first time in 8 years and openly stated they would be raising rates around 4 times this year; AND within a month the market prices in less than a 4 percent chance of such an event. What the heck has happened in the last 30 days? In short stocks have had one of the worst January’s in history. Housing starts are down. Building permits are down. CPI was down (uh, oh). Jobless claims are up. Unemployment is no longer dropping. Import prices are dropping (we are importing deflation). Retail sales down. Oil is down. GDP below 1%. I didn’t even mention the problems in China. Yields around the globe are down. Heck, Japan lowered their key short term rate to a negative yield today. Take a look at the following:
Notice a trend?
Further analysis of the Fed’s comments this week indicate a more dovish (rates down) stance. When characterizing growth their language changed from “moderate” to “slowed”. Consumer spending went from “solid” to “moderate”. One key sentence they removed from their statement was that risks were “balanced”. They didn’t modify the language, they removed the sentence altogether. I read this, as do most, that this signals they are stepping back from the 4 rate hikes in 2016 but don’t want to raise any alarms. What you have to acknowledge is that the Fed was fairly certain that they would raise rates 4 times in 2016 and it’s only been one month and they are already backing away. AND despite what has transpired and the change to their language, the Fed continues to indicate that growth will accelerate and commodity prices will return to normal levels with inflation returning to 2 percent. It’s starting to feel like wishful thinking. Actually it’s felt like wishful thinking from the Fed for 3 straight years. Next up, NonFarm payrolls are one week away but be sure to keep an eye on the price of oil. It hit a 12 year low last week at around $26 per barrel.