Mid-Day Recon

Good Afternoon,

                       Now, what does the Fed do?  With equity markets at or near all-time highs, with US Treasuries still yielding far less than could be considered normal, and with undeniably improving macro…….. Is it time?  Oh, and there was the Brexit referendum, which really never presented a threat to the US economy at all.  I think we can all agree that the FOMC’s hands are tied for this meeting.  Do they now set up September as a live meeting?  This close to a national election?
                       It will, or it should come down to the macro.  Almost all of your recent headline level macro events have printed at stronger than anticipated levels.  Just today, June New Home Sales printed at an 8 year high for the series, Consumer Confidence surprised to the upside after the University of Michigan print came in somewhat gnarly two weeks ago, and the Richmond Fed Manufacturing Index showed remarkably improved strength in New Orders, Shipments, and Capacity Utilization.  To expand on this, June was a strong month for Retail Sales, Core Inflation, Industrial Production, Housing Starts, and Non-Farm Payrolls.
                      The economy is undeniably ready for a smidge of normalization, and I think that the markets could handle a quarter of a point a year, which could hardly be called a “tightening cycle”.  There are problems though, such as divergent policy direction that in turn will cause US dollar valuations to increase.  That will hurt multi-nationals.  Then again, the bond market truly gets the final say on interest rates anyway.  The underlying economy is ready, though.  That’s my opinion, and I bet a few folks at the FOMC agree.  If they feel timid on rates, they should at least be moving to sell bonds out of inventory at this time in order to reduce balance sheet risk.