FOMC Trumps Trump – May 26, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

FOMC Trumps Trump

Though hamstrung by the Trump administration’s woes with North Korea and widening gaze with regard to tariffs, the indices managed to eke out a small gain thanks to dovish leanings from the FOMC minutes on Wednesday. The Fed expressed some hesitation on rate hikes beyond its June meeting, even though inflation (except the PCE gauge) is currently above both the Fed Funds rate and the inflation target rate of 2.0%. If market rates keep moving up “mysteriously” over time, the Fed seems content to be, as we’ve said here before, “behind the curve.” That means it will essentially chase rates higher, but only when politically convenient to do so. Parenthetically, positioning itself behind the curve also allows the Fed some room to name scapegoats (i.e., the banking sector, the President) if and when a crisis develops. In any case, thoughts of a more dovish Fed seemed to have the effect of floating all boats across the markets. Stocks, bonds, the metals, and the dollar rallied to some degree. Please check the box scores for the final tallies.

The economic data released this week served as a great supporting cast to the Fed’s shifting posture, as a few of the more important numbers indicated that a softer economy is afoot. In April, New and Existing Home Sales fell 1.5% and 2.5% respectively, while the FHFA House Price Index rose 0.1% (vs. 0.8% in March) – its lowest reading in years. Also, preliminary figures for Durable Goods (also in April) showed orders fell 1.7% on weaker transportation and defense. Manufacturing- and service-based opinion polls reflected conditions that were a little better and/or stable at present.

Interestingly, the media seemed very eager to proclaim a steeper yield curve following issuance of the FOMC minutes on Wednesday. It was as if their stories had already been written before the day’s events. Of course, to their chagrin, this did not happen, as the spread between the 2- and 10-year Treasuries narrowedto 45.0 from 49.0 basis points as long rates fell faster than those at the short end of the curve. I say this because, if this dynamic persists, profits in the financial sector will continue to dwindle (as they will subsequently in the corporate sector) regardless of whether the Fed is hawkish or dovish. At any rate, it’s just one more data point to consider in the eventual deleveraging (and/or dislocation) in the financial markets.

Best Regards,

David Burgess
VP Investment Management


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