Should the FED shock the market with the hike this time?

Outlook:

After a breakout, we almost always get reversion to the mean. Then we have to wait for the pullback to end before we can be sure the move in the breakout direction has momentum. Breakouts fizzle all the time. This one has the right smell for continuation.

The one vulnerability (and it’s not a big one) is the Fed policy meeting tomorrow and Wednesday, ending with the 2 pm statement (with new dots) and the press conference at half hour later. Some smarty-pants say the Fed should shock the market with the hike this time instead of April or June, nut that’s not how the Fed works. Like Martha Stewart using exaggerated pronunciation, the Fed likes to give advance warning and avoid any and all surprises. It gets enough criticism for other things and doesn’t need to add “failure to communicate” to the list.

Today might be a yawn unless traders start positioning for tomorrow’s data, which includes retail sales, PPI, the Empire State Manufacturing survey, and business inventories. Even more interesting than retail sales will be Wednesday’s inflation data. Last time out, CPI was up 1.4% y/y, the highest reading since late 2014. See the chart from the Wall Street Journal. Better yet, show it to the bond market.

Closely related is the JOLTS report (Thursday) showing voluntary job-leaving and new hires. We can dismiss the Phillips Curve all we like, but you don’t get inflation without rising employment and rising wages. And the odds of the US going into recession are a tad lower (20% from 21%) but not zero.

According to the WSJ survey last week, the most pessimistic economist puts the odds at 50% (Standard Chartered). Allen Sinai (Decision Economics) says there is zero chance. “Jobs growth, income and consumption too solid and strong for a recession to occur.” The economy has “no real excesses” that could lead to a recession. Presumably Sinai is using “excesses” as a proxy for “crisis trigger.”

We expect the Fed to stay its hand this week and to be as annoyingly unclear as before of its intentions. That means analysts parsing every blessed word but more importantly, the new dots showing where members see rates out into the future. At a guess, the Dots will rule. We hate to admit it, but if oil continues to firm and $20 becomes only a dim possibility from the past, the dollar can resume its overall slide. See the dollar index chart on the first page of the Chart Package.