Markets Catch the Jitters from FOMC Meeting Next Week

A week from today, the Federal Open Market Committee opens its September meeting. It will report out its action or inaction the next day (September 21). The jitters have begun yet again.

Perhaps they are being fueled just by “normal” fears that are always present before a Fed meeting. Apparently Fed Governor Lael Brainard’s remarks yesterday, which were markedly dovish, did nothing much to allay those fears.

One reality note that may have driven markets to believe that the Fed might raise rates is that it was finally “officially” reported out that middle class Americans saw their incomes rise in 2015 by 5.2%. But that is a spooking number, the reality of which for the consumer with his or her boots on the ground has not translated into a wild spending spree and therefore, inflation.

Rather, it is a reminder that the American economy is just now getting out of the huge hole created in 2008 and 2009. Real median income rose to $56,500 in 2015. The previous median income top-out point was the pre-recession 2007 high, which was $57,200. We are not going to discuss in depth here the distribution of these increases, nor the imbalances that are structural in the rise. Suffice it to say that the markets are reading the growth as a possible torch put to the gasoline of inflationary pressures.

But it should be noted that, given the mal-distribution of the income increase, tilted as it is toward the top, we can expect that group to add very little to inflation. How many Benzes can you purchase, after all?

The report moved the dollar higher against the euro, yen and British pound. The smallest rise was against the euro. It is barely registering, although it is affecting commodities.

Spot gold is down note quite 0.75%, although regular trading is pushing down prices beyond the losses shown from dollar strength. At 4PM in New York, spot is down $9.50. Silver is off a total of 1.20%, with regular trading bearing the lion’s share of blame.

Oil took a big hit today, following news that the International Energy Agency and OPEC predict that the oil glut will continue on its way well into 2018, if not beyond. Analysts expect U.S. government data on tomorrow to show a very large stockpile build of 4.5 million barrels in crude last week.

Some of today’s down movement can also be allocated to the fear of higher U.S. interest rates, which conventional wisdom tells us will cut energy demand by factories, businesses and homeowners.

But the depressed prices are structural as we have pointed out many times here. Too many countries are pumping too much oil too many days per year. And, with a more decentralized supply, prospects are slim to none prices will decline significantly. (Unless there is a massive war in the Middle East.) And consider that not all big producers are even at maximum capacity right now. West Texas Intermediate dipped below the $45-per-barrel mark once again. We’re looking for the low 40s and then we’ll reconsider direction on the fundamentals. Charts should be very interesting.

The equities took a hit, giving back much of yesterday’s gains which took back much of Friday’s losses. Got that? That totes up to a lot of volatility, which is reflected in the VIX. (See end of our letter.)

The 10-year U.S. bond yield leaped to well over 1.70% today. Last Wednesday we were under 1.55%.

For all that, the CME’s rates futures indicator shows that the people in the trading pits are betting there is only a 15% chance of a rate hike come Wednesday, September 21.

The VIX volatility index is jumping up like a rabbit, though. It moved up over 18, another big rise, this one of 20%.

Wishing you as always, good trading,