As we have noted quite a few times, there is quite a lot to be said for the potential economic and geopolitical pitfalls facing the equities… even the upside leader US equities. And yet, the Fed accommodation indications of late remain in spite of somewhat more hawkish aspects to last week’s economic projection revisions. On the face of it, the continued accommodation from the FOMC last Wednesday is a sustained friendly influence. It seems the Fed is maintaining an ‘endless easing’ syndrome due to its sensitivity to the relative weakness of what is now an extended cyclical recovery.
And while recent ‘bad news’ (weak economic data even in the United States) had fomented an extension of the equities rally, that seems to be changing this morning. The question is to what degree? For right now that remains nominal. The December S&P 500 future has managed to slip below the 2,000-1,998 support it could not dip back below late last week in spite of weak data. Yet, even so that is only nominal so far, and more important support awaits in the 1,990-88 range and again into 1,982-80.
The degree to which the Fed has now downgraded various aspects of their forecasts (especially employment) leaves the door open to more future easy policy than is consistent with their continued fear (and desire) that inflation will normalize. What we know for sure is that they have upgraded their economic and inflation projections enough to justify hiking rates whenever they choose.
Yet, the Fed’s projections have been notoriously off target in the past. And for now the government bond markets response seems to say they don’t think that growth and inflation acceleration will be there. Or at the very least that it will come as soon as the Fed expects in its ‘rates will normalize by late 2017’ assessment.
That the Fed might also be concerned about this was also signaled by their keeping the ‘considerable time’ language for their continued accommodation. As we have noted quite a few times, the accommodative language from not just the Fed but most other developed country central banks does seem to support risk assets. Yet the weak economic growth and concerns about potential deflation in some areas remains the reasons they feel they can and should stick with that policy.
So somewhat stronger data at times blended with obvious central bank accommodation can support risk assets. Yet the degree to which that will continue in a broader economically weak environment is beginning to come under question. With more weakness than previously anticipated throughout Asia and Europe, the question is finally being asked, “Just how much ‘bad news’ is indeed actually ‘good news’ right now?” That is even more pointed at present in light of the significant weakness of commodity prices in spite of unsettled geopolitics.
This where we revert to technical trend indications to listen to what markets have to say about it in their own right. For now there seem to be a few more fissures in the bullish dike, yet with any bearish flood yet to be seen.
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