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.
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.
Lower panel shows the Dow Jones Industrial Average
Exhibit 3 Free yourself, open up your mind and just let this slide sink into you.
Stock market is ripe for rate hike
Very important disclaimers:
- 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).
- 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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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."