Nell Sloane's Trading Notebook: After the Rate Hike and What's Next

09/28/2018 6:00 am EST

Focus: MARKETS

Nell Sloane

Principal, Capital Trading Group

The FOMC raised rates another 25 bp to a high mark range of 2.25%. We applaud the continued move. We feel that we could be doing more and doing it faster. Holding interest rates or real rates still negative, some 10 years after the 2008 crisis is deeply concerning.

All too often people focus on the Fed Funds rate, but the real rate, the FF less inflation, is still negative. Rates are still very accommodative...although the Fed left that word out of the statement today.

Watching Powell is like watching your Accounting professor discuss reconciling the balance sheet on a late spring afternoon. He and the Fed continue to use words like transitory, gradual and appropriate, a decade into a recovery and we are still using these words.

The dot plots are all calling for continued hikes peaking around 3.25/3.65%. We view this as highly opportunistic and we do not think the global economy nor the domestic economy will be able to absorb such a short rate given the sheer size of global debt growth. For those who haven’t seen, we often use our own “dot plot” picture:

01 - Future of Fed Dot Plot

Considering the Fed’s efforts are essentially being offset by continued negative global interest rates, and continued asset purchases via the PBOC, BOJ and ECB, we wonder just exactly what the ultimate outcome will eventually be.

Another and most often overlooked facet of each rate hike, is the fact that the Interest on Excess Reserves rises as well.

As this next graph shows, the subsidy to the banking sector per annum now stands at $42.3 billion in free money:

02 - $ Val IOER

Steve Liesman of CNBC asked why the Fed Funds rate needs to move above a neutral level. Powell responded, monetary policy will be assessed at each meeting and there they will discuss the appropriate level to meet our policy goals.

Basically, he didn’t answer anything, which is appropriate, because they really don’t know why or exactly how a certain rate will reverberate through an economy. The Fed trusts their 700 Ph. D.s to guide them, but the reality is they are just guessing, plain and simple.

Anyway, the Fed raised rates, it was widely expected and as our readers know, the goal is to get the Fed Funds to rise above the 10yr rate and they will succeed in doing so, most likely in June of 2019 as the rate rises toward the 2.75% to 3% level.

You see dear reader how these central banks buy decades of time…it just seems to fly by.

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As interest rates rise and debt rises, so to does the obligation to pay said debt. Who doesn’t love the definitive nature of mathematics? Some things you just can’t fudge and eventually interest will consume more of our domestic budget than mighty defense itself.

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We read another great piece from Rusty Guinn at Epsilon Theory.

In it he outlined the 5 biggest mistakes investors should avoid:

03 - 5 Mistakes Investors

The link to this letter can be found here.

We feel there is a lot of truth to this list and it condones some deeper contemplation. We all seek value, we all seek limited risk, but within those realms, we must find what is appropriate at any one given point in time.

As time changes we change and those changes require us to adjust our strategies, that is as real and honest as we can get.

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Ok, onto the technical side of the markets that we follow.

The U.S. Treasury market rallied after the decision and the 10-year yields fell 5 basis points off its highs and is putting in what is currently a double top formation:

04 - TUS 10MY 9-26

Moving toward the equity markets, the Emini S&P 500 fell hard off its highs and ended up lower on the day and the bull/bear fight continues 2870 below is the short-term support:

06 - E-mini S&P 9-26

The Nasdaq fell nearly 1.2% after the number and has outpaced the other equity markets but continues to look vulnerable:

07 - E-mini NASDAQ Dec 18

The Dow hit the top of our trend channel and continues to be defined within these parameters:

08 - E-Mini Dow Dec 18

Cheers,

Nell

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