WASHINGTON, December 15, 2016 – Thursday’s stock and bond market action proved about as hard to track as possible, given Wednesday’s FOMC 0.25 percent goosing of the closely watched overnight funds rate. The current range of 0.25-0.50 percent will be magically transformed into a range of 0.50-0.75 starting the first of the New Year.
Stocks took the news fairly placidly when it was formally announced at 2 p.m. yesterday. But then, at least according to the financial punditocracy, they noted Fed Chair Janet Yellen’s comments that the nation’s central bankers were considering not two but three more rate hikes in 2017. When traders noted that little bit of fine print, the boos, hisses and catcalls drowned out, at least for the afternoon, the current, almost excessively bullish Trump-Santa Claus Rally, ultimately smashing the widely-followed Dow Jones Industrials, which promptly plummeted, ending the day down over 100 points.
The real story might be a bit more mundane. With a heaping helping of short-term profits on their plates, it’s likely that the hedgies and the high-frequency trading (HFT) firms and/or their computers kicked off a massive sell program, primarily targeting many of the issues that have scored the greatest gains since President-elect The Donald celebrated his “unexpected” (by the MSM) win. We think things were no more complicated than that.
But Wednesday’s interest boost leaves questions, the chief one of which is this: Is Janet Yellen going to rain on the soon-to-be-President Trump’s stimulative parade before it even gets started?
Given Trump’s Fed sniping on the campaign trail, one would assume he’d view this interest rate hike as a partisan stab in the back. But maybe not. After all, Trump himself was also railing on the length of time the Fed had spent holding interest rates at all-time lows—something that seemed to work in the early innings, but has proved counterproductive in recent years.
At least one CNBC commentator noted what may not be obvious to many, particularly the legion of “intellectuals” dead-set against a President Trump:
“‘I’m sure that the president-elect would like to have his pro-growth agenda not be killed in the cradle by the Federal Reserve,’ said Ed Keon, portfolio manager and managing director at investment research firm QMA. ‘He’s fortunate to have a chair at the Federal Reserve who shares a similar set of ideas about how the U.S. economy should perform to reach a greater percentage of people in the next couple of years.’
“At the root of Trump’s fiscal plan is a rollback in tax rates and increased domestic infrastructure spending in the neighborhood of $1 trillion. Many evaluations of the plan figure that will tag on another $5 trillion or so to the $19.9 trillion national debt.
“Whether that gaudy figure is manageable is fully dependent on the cost of debt service. In other words, low rates are going to be pivotal to make aggressive fiscal policy work.”
Well said, Ed. CNBC also notes something the Maven has been preaching here for years, namely that part of the reason the Fed has let interest rates linger so long below sea level is that Congress (and particularly the Harry Reid-led Senate Do-Nothings) never did its part to help the Fed out, leaving first Ben Bernanke and next Janet Yellen hanging in the wind with their fiscal ammo largely depleted:
“Yellen and her predecessor Ben Bernanke have beseeched Washington lawmakers to come up with a cohesive, pro-growth fiscal policy. Instead, Congress and Obama have been deadlocked on spending priorities, resulting in budget-by-resolution that has come with little vision on promoting growth.”
To that observation, the Maven says, “Amen.” If the now totally Republican-led Congress and Trump can get along for at least a few months, the last vestiges of the oppressive Obama-Reid-Pelosi Do-Nothing About the Economy clouds may lift and Congress might actually do its part to boost the economy after 8 long years of vacation and inaction. It’s high time the Stupid Party put a little pep into its step. Or so the voters think.
Of course, with the bond vigilantes asserting themselves, as they have all fall (if you’ve looked at interest rates for you and me), the interest rates the general public pays for credit, whether on credit cards or fresh real estate loans, have really been jumpin.’ That’s something that our friends at ZeroHedge—who are always ready to rain on any parade—note in a Thursday article entitled “Freddie Mac Issues a Warning As Mortgage Rates Soar.” We include the charts ZH provided in the excerpt below:
“According to the latest Wells Fargo refi rates, a 30 Year Fixed mortgage will now cost a prospective creditor some 4.625%. This was in the mid-3%s just a few months ago.
“It was not just refis: according to the latest Freddie Mac update, the 30 Year Fixed has jumped to 4.16%, from 3.94% just a month ago, and 3.5% as of early October.
“As Freddie notes in its latest press release, this week’s mortgage rate survey was completed prior to the FOMC announcement. The 30-year mortgage rate rose 3 basis points on the week to 4.16 percent. The MBA’s Applications Survey posted drops in both refinance and purchase applications, registering the impact of recent mortgage rate increases.”
The point here is that these remarkably higher new mortgage rates could kill off the building boom everyone was getting excited about. But the fact is, nobody really knows. And it all may depend on how aggressive the Fed is with those interest rate hikes in 2017. At this point, it would appear that the Fed is a bit behind the curve while the banks and vigilantes who have been jacking up consumer rates for at least the last calendar quarter are more than a bit ahead of reality.
We’ll just have to see how things play out.
Meanwhile, the markets did recover modestly today, with major averages pinned back in the green zone with roughly 0.30 percent gains at Thursday’s close. So stay tuned. The Trump-Santa Claus Rally may return at any time, since most traders seem to want another helping of the same.