Gov’t Shutdown, Trade War, and the Market

Deal or No Deal? That is the billion-dollar question on both sides of the Atlantic.

Despite what we’ve been led to believe, the Federal Reserve Bank of the United States is not a benevolent government agency set up to act in the interest of the public. Instead, it’s a private entity set to act as the means to fund the U.S. government with the mandate by Congress to provide for maximum employment and stable prices.

Stable prices, to the Fed, mean that the level of inflation that’s acceptable is around 2%. Banks want inflation to boost lending profits.

The Federal Reserve is simply an organization set up to make sure banks are profitable and the U.S. government has resources to fund its trillions of dollars in mostly wasteful spending.

We, the public, don’t need a central bank to help guide our economy and the idea that the Fed has the tools to do so, is ridiculous.

It Does More Harm than Good…

The Fed is more likely the cause of financial disruptions than it’s been helpful in avoiding them.

The Fed does have the power to move the markets through its actions, and traders like us will try and profit from those moves.

Federal Reserve Chair Jerome Powell has been steadily losing credibility with the markets since December’s rate hike.

Powell’s comments after the December policy meeting indicated that Fed policymakers lowered estimates for additional rate hikes in 2019 from three to two and lowered the estimate for the neutral rate from 3% to 2.8%.

Stocks have yo-yoed since the meeting.

After last Wednesday’s release of the meeting minutes…

Major news outlets have heralded the end of this historic bull market. Yet America’s

…it’s clear that there’s uncertainty about the timing of future hikes.

While many Fed officials are willing to be patient on any further hikes, a few officials favored not hiking in December, and others believe that downside risks have increased.

The confusion stems from the Fed saying that economic data is strong, but market data proves otherwise.

Is the Fed reacting to economic developments or is it reacting to financial market movements?

Powell said that the Fed can be patient on rates. They’re waiting and watching and willing to be flexible if need be.

And when Powell went on to mention that the Fed wants the balance sheet to return to a more “normal” level, and that it would be substantially smaller than now, but larger than before the crisis, stocks sold off.

What the Numbers Look Like…

The update on wholesale prices was a disappointment. The December Producer Price Index (PPI) fell 0.2% on the expectation it would remain steady on the month.

Excluding the volatile food and energy component, it also fell 0.1% on the expectation it would rise by 0.2% on the month.

Wholesale price tend to lead consumer prices and, last week’s consumer price update was also a disappointment.

Friday’s Consumer Price Index (CPI) fell 0.1% on the month and fell from 2.2% to 1.9% on the year.

The energy index fell 3.5% in December, while the gasoline index fell 7.5% last month. In November, it fell by 4.3%.

Core inflation (less food and energy), moved up 0.2% on the month and remained up 2.2% on the year, as expected.

Treasury yields fell after a significant bounce over the last week.

Even though the Fed’s contention that economic data is strong, inflation seems to be sagging. If we continue to get mixed messages from the Fed, expect market volatility to continue.

That’ll be good for us since market volatility tends to trigger trading opportunities more often.

A Brick in the Wall

It doesn’t look like President Trump will give in to Democrat’s demands regarding the border wall.

Monday marked the longest government shutdown ever seen.

As for the trade deal with China?

That’s another question mark in the mix…

The stock market tanked Christmas Eve, then recovered by 10% (mainly because of the hope a deal would be struck). It seems that the hope for a deal is now in troubled waters. Though the White House seems positive about the direction of talks, and China said the talks helped to establish a foundation to resolve differences, details of the actual issues were missing.

In any case, the U.S. and China agreed to maintain close communication on trade, unlike President Trump and Democrats on the shutdown.

In the face of the lack of a trade or budget deal, Treasury yields climbed, along with stock market, in the last week. After dipping to 2.9% a couple weeks ago, the long-term Treasury yield bounced back to 3.05% late last week.

I’m not too confident that the Fed will act to prevent another eventual downturn.

So, stay alert. And stay tuned!