Later this afternoon, Janet Yellen must fulfill her role as “Soother-in-Chief” of the world economy. Can she accomplish that without compromising her role as “Truth-Teller-In-Chief?” It will be a tightrope walk.
According to the FOMC statement last week, one of the primary factors in the decision to keep rates near zero was the economic condition of much of the rest of the world. It seems as if equities markets reacted quite negatively to that notion, although anyone with even a passing knowledge of the state the world knows there is a lot of shredding around the edges and a few rips and creases in the middle of the fabric.
The China debacle is the biggest weight, but next in line is continued sluggishness in Europe. (VW hasn’t helped one iota.) The U.S. is desperately trying to drag the whole economic freight train back into the green for the year, but there is only so much even the world’s largest economy can do.
Worries that an eventual tightening in U.S. monetary policy and slower growth in China could knock down the global economy have scared investors, prompting renewed safe-haven interest in gold. Gold is up over $20 today, mostly on action in regular trading although a weaker U.S. dollar is helping it as well.
On a brighter note, weekly U.S. jobless claims rose only very slightly, it was reported today. A rise of 3,000 new claims is statistically insignificant.
Equities did some bottom testing today, and are now trying to work back to even on the three major U.S. indices. We’d like to focus just for a moment on the S&P. Many analysts are saying it is troublesome. Yet, the S&P is up about 240 points from its levels of two years ago and down about 150 from its July highs. Not great, but certainly not apocalyptic.
Certainly the New York exchanges recently seem to be much sturdier than either Europe or Asia. Maybe that’s what Ms. Yellen is thinking… why allow a slightly weak Europe and an even weaker China and Japan drag the American economy into the snake pit? We think it makes eminent sense.
It should be noted that U.S. durable goods slid 2% for August and that (advanced intelligence?) may have persuaded all but one of the FOMC voting members to keep away from the ignition button that would lead to a rate liftoff.
Our thinking is it would be suicidal to nudge rates up even a little right now.
However, Chairwoman Yellen needs to communicate that, while conditions aren’t the best they can be, we are miles – or kilometers – away from the turnoff marked “Panic, Next Exit.”
Wishing you as always, good trading,