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4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - Hawk dove cartoon 06.06.2016

 

Do you believe the Fed's forecasts?

 

Well ... do you?

 

You shouldn't.

 

Take a look below at the downwardly-revised projections for the year-end 2016 Fed Funds rate (via the median of the FOMC's dot plot) in the green line below. At its height in 2014, the FOMC expected the year-end 2016 Fed funds rate to be just shy of 3%.

 

The FOMC's March forecast? Under 1%. 

 

Click to enlarge. 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fomc dot plot revisions

 

Looking out a few years, via their latest projections from March, the Fed heads expected the Fed funds rate will be just below 2% in 2017 and, in 2018, hit 3%.

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fomc projections

 

Note: Less than 6 months into the year, the Fed has pivoted from hawkish (December) to dovish (March/April) to hawkish (May) and will now pivot back to dovish again. So the question now is what does that do to the dot plots?

 

Well, the market is guessing... 

 

The implied rate hike probability for June has been squashed to 0% today, versus 30% just eleven days ago the time span between which Fed head Janet Yellen flipped back to dovish again.

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fed funds futures 6 7

 

It's also worth reflecting on the historical market bets for a June rate hike, if only to visually understand the Fed's circuitous pivots from "hawkish to dovish." Six months ago, Fed funds futures put the probability of a June hike at a whopping 68%!

 

4 Charts: An Appraisal Of The Fed's Perennially Faulty Forecasts - fed funds history june

 

There's one key takeaway...

 

The risk to investors is believing the Fed's serially-overoptimistic forecasts.


U.S. Jobs Signaling Late-Stage Risk

Takeaway: While the market is taking a "bad news is good news" approach, the reality is that the labor market is slowing down.

U.S. Jobs Signaling Late-Stage Risk - Jobs cartoon 06.05.2015

 

Last Friday's weak non-farm payrolls report was the most important takeaway on the week. Surprisingly, it had only a nominal impact on many of the risk metrics we track. This was likely because the market took the bad news as a sign the Fed won't move on interest rates in June.

 

To be clear, the paltry 38,000 jobs added in May was the lowest NFP reading since September 2010. Even if you add back the approximately 35,000 striking Verizon workers, the "real" number was still sub-80K -- that's obviously well below potential and weak by any reasonable measure.

 

Bottom line? Coupled with the 60,000 downward revision to March/April NFP ... and the now growing (Y/Y) trend in initial jobless claims... the U.S. labor market mosaic is increasingly comporting with our cycle twilight narrative.

 

Watch U.S. Macro analyst Christian Drake discuss the “Labor Market Conditions Index” which just posted its 5th straight month of negative reading (worse since '09) and what it portends for Fed policy.


INSIGHT: The Limits Of Global Monetary Policy via Council on Foreign Relation's Dr. Benn Steil

Takeaway: "I wish these guys [at the Fed] would stop being rock stars and be more honest about what they don't know."

"A record 23 countries — accounting for a quarter of world GDP — now have central-bank policy rates of zero or less.  A further six — including the United States — have policy rates of 1 percent or less," write Dr. Benn Steil and Emma Smith of the Council on Foreign Relations in a recent column for PBS. 

 

It's a thought-provoking read which calls into question the efficacy of additional, unconventional monetary policy measures. Steil and Smith conclude:

 

"In short, the world economy is running on monetary fumes. We had better hope it picks up steam on its own, because policymakers are unlikely to be of much further help."

 

Dr. Steil and Hedgeye CEO Keith McCullough discussed the significant challenges facing investors as global central bankers continue to manipulate markets in a recent installment of Real Conversations on HedgeyeTV. "I wish these guys [at the Fed] would stop being rock stars and be more honest about what they don't know," Steil remarked during the interview.

 

We wholeheartedly agree. 

 

Watch the complementary video replay below.

 


Early Look

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What Volume Tells Us About The (Lack Of) Conviction In The U.S. Stock Market

Takeaway: The lack of conviction in each up day in stocks is clear with U.S. total equity volume down -12% yesterday versus its three month average.

What Volume Tells Us About The (Lack Of) Conviction In The U.S. Stock Market - Volume cartoon 08.12.2014 

 

Upon closer inspection, each up day in U.S. equity markets reveals a telling lack of conviction. 

 

Investors express confidence in the direction the market is headed via the amount of trading volume on U.S. exchanges. Lately, volume has all-but disappeared.

 

Total U.S. equity volume was down -12% yesterday versus its three month average. This trend, of declining volume on rising prices, has continued for some time now. Interestingly, volume has been accelerating on down days. 

 

 

Understanding the intimate relationship between price, volume and volatility (how we manage risk here at Hedgeye) is essential for any investor. In the video below, Hedgeye CEO Keith McCullough gives a brief tutorial on the different permutations of price, volume and volatility with insights about what the current environment is telling us.

 

Spoiler Alert!

 

Today's U.S. stock setup isn't good.

 


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 6 7

 

Daily Market Data Dump: Tuesday - sector performance 6 7

 

Daily Market Data Dump: Tuesday - volume 6 7

 

Daily Market Data Dump: Tuesday - rates and spreads 6 7

 

Daily Market Data Dump: Tuesday - currencies 6 7


The Repercussions Of Yellen Fed Burning The Buck & How To Trade It

The Repercussions Of Yellen Fed Burning The Buck & How To Trade It - burn buck

 

With the Yellen Fed intent on burning the buck, the U.S. dollar continues to drive asset reflation.

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:

 

"Not surprisingly, USD oversold signal registers overbought signals in CRB Index, Gold, and Copper – WTI’s overbought level right around $49.99/barrel (CRB Index overbought level = 193); Copper backing off 1st, as it’s the weakest of the reflation hands short-term traders are willing to hold."

 


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