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3 slides that suggest there just might be a rate hike this week

By now everyone should know that I am a firm dis-believer of rate hikes from the US Federal Reserve – based on economic/financial reasons. I believe this strong scepticism was explained here. BUT I have also said that no one should be naive to think that a body like the Federal Reserve will behave according to economics/logic/whatever they claim to. In my special event last Tuesday, I showed three slides that indicate a high chance of Fed action i.e. raise rates according to data (just not the inflation and employment data they claim to be following). Note that since Friday, market has turned to a major risk-off mode with stocks selling off and jpy-crosses at low. This was pinned on Brexit polls but just imagine what-if? What-if results of the latest Brexit poll was just a cover? Just think of the slow boiling frog analogy.

 

What if the data driving the Fed was the Dow/S&P?

Exhibit 1. Consider that Yellen was mouthing ‘rate hikes’ since 2014. Consider that for all that better data from 2014 – early 2015 she did not hike. Consider that she hiked into December 2015 when data was turning for the worse in Q4. Now this slide is a pretty telling picture. Despite the hike in December 2015 and promises of 4 more hikes in 2016, DXY did not bother to touch 100. Just think of this – if more hikes were really coming, why didn’t the USD strengthen anymore beyond 100? Unless the market did not believe there was going to be anymore. What this slide says is that the Fed is basically talking the USD up and down and would be happy to keep DXY between 92 and 100. The strategy goes like this: DXY 100 (strong), go dovish, DXY 92 (weak), go hawkish. Looks very logical, doesn’t suggest any rate hike.

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DXY movement since 2014

 

Exhibit 2. What-if just what-if the Fed isn’t driven by economic data like the NFP and is not driven by the DXY? What if the Fed was driven by the stock market? We can then see that the Fed (focus on D, E, F) went hawkish when the Dow was doing well, and then dovish when the Dow corrected. In my opinion, still makes a lot of sense. This is where slide #3 comes in.

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Lower panel shows the Dow Jones Industrial Average

Exhibit 3 Free yourself, open up your mind and just let this slide sink into you.

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Stock market is ripe for rate hike

Very important disclaimers:

  1. I don’t have a Capital Market Services license so I am not qualified to give financial advice. In fact I am just a person who is also navigating the mine field which I think over the years have gotten very dangerous. If the coming FOMC does turn out to have a rate hike, then the investment/trading game is very dangerous/troubling indeed because we have policy makers who have no reservations about withholding vital information or pointing us in the wrong direction (which admittedly they did not have to tell us the truth).
  2. I don’t do any forecast. What I do here has zero forecasting value. What I do is study history and in my opinion, I have merely stated observations which could turn out absolutely spot-on or just coincidence.
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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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3 thoughts on “3 slides that suggest there just might be a rate hike this week”

  1. Lye Fong Phyllis TOH says:

    Thank you Mr Soh for sharing again. Your analysis/observation is very valid. I take full responsibility on my own trading risk.

    P.S. I was watching the old videos that you hv conducted BP/4M & it reminded me about your weekly analysis on blog. Although different style as Binni but I enjoy reading your analysis.

    1. Soh Tiong Hum says:

      Hi Phyllis thank you for your encouragement. Sometimes I do feel like I am talking to myself. Binni and I operate as a team but we are very different. Diversity helps because no individual can be right every time. I do notice that when both of us agree, the outcome is very strong.

  2. Wei Jie PEH says:

    Interesting post. Thanks Mr Soh. Always like your way of linking up the stuffs and very exciting to know about!

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