Fed on Backburner

Wednesday saw a nice reversal in the price of stocks and oil as the market reacted to several news items beginning with the Institute of Supply Management (ISM) service numbers (much-better-than-expected) and later the release of the Federal Open Market Committee (FOMC) minutes. The Fed acknowledged in its last gathering that they were unsettled by the recent British Exit vote.  Interestingly, while their UK counterpart has already deemed Brexit as a financial headwind that could become something even direr; the Fed wants to take a look-and-see approach.

FOMC Minutes

Staff Review of the Financial Situation
Domestic financial market conditions remained accommodative over the intermeeting period. Equity price indexes and corporate bond spreads were little changed, on net, and, in aggregate, corporations continued to tap credit markets at a solid pace. Credit also remained broadly available to households, except for higher-risk borrowers in some markets. The expected near-term path of the federal funds rate implied by market quotes varied notably over the intermeeting period. On balance, it flattened, largely in response to the disappointing May employment report and growing concerns among investors about the British referendum on membership in the European Union. The flatter expected path of the federal funds rate, along with an apparent decline in global risk sentiment early in the period, contributed to an appreciable reduction in longer-term Treasury yields.

However, a lot has changed in the last couple of months when the Fed seemed dead set on hiking rates, come hell or high water.  Well, they didn’t factor in anemic jobs data so that whole rate hike fever broke, and now it’s back to a pedestrian approach to an interest rate policy driven by actual data.

Trade Deficit

May’s Trade data out yesterday didn’t necessarily move the economic needle, but it is a major issue in this year’s race for the White House.  With China and Mexico; public enemy one and two, Americans are pondering if we could somehow pump the combined $157.5 billion trade deficit (year-to-date) back into our economy.  Obviously, the money is there, but the question is whether people would spend that kind of dough on items at much higher prices in the name of patriotism.

Overall, the trade deficit is getting back to normal levels as a major dip in imports in March and April. However, the strong dollar isn’t going to help these trends; at the end of the day, large trade deficits are a sign of a nation’s wealth, and it’s going to be tough to be the a low-cost producer and rich at the same time.  This is not to say that policies need revamping and that we need to stop getting pushed around, but I’d still rather start a business and raise a family in America than in China or Mexico.

Furthermore, I like the way the market has been able to reverse itself with the right stimulus, which is good old-fashioned stimulus, but there has to be something akin to a blockbuster that break out stocks; tomorrow looms large.