Fed Will Not Be Dovish As Expected Today – Wage Inflation Is Their Concern

Posted 9:30 AM ET - The Fed will raise rates this afternoon and many analysts are expecting the word "accommodative" to be removed from the statement. This would be dovish in their eyes and the market should rally on the news. I am going against the grain and I believe the statement will be neutral to slightly hawkish. Wage inflation will keep the Fed in tightening mode. The bid to the market is strong so the damage will be relatively contained. Higher yields in the US will put upward pressure on global interest rates and emerging markets will feel the pinch. Many countries (Russia, Argentina, Pakistan, Turkey…) are struggling with currency devaluation. Credit conditions need to be monitored closely. Trade talks with China have stalled and Trump is preparing for the next round of tariffs. Even if negotiations are scheduled there will not be any progress. China feels that the tone might improve after the elections provided that Democrats win the House. Earnings season is around the corner and we could see tariff related warnings. This is the biggest market threat in my opinion. Trade talks with Canada are at a standstill. The clock is ticking and an agreement needs to be reached in a few weeks or NAFTA might not happen this year. Mexico's new president takes office December 1 and he is likely to veto the current proposal. Canada is aware of the situation and they will use it to their advantage. Trade talks in Europe will not progress and Trump will get frustrated. The EU and England have been embroiled in negotiations for a year and a half without a Brexit solution. The EU is fragmented (many nations and many industries) and I believe a trade deal will not happen for many months. The good news is that the tit-for-tat tariff escalation has temporarily stopped. The November elections are a month away and Democrats are favored to win the House. Tax cuts have been approved and they are not in danger. Trump has been able to reduce regulations from the White House and that will continue even if Republicans lose the House. Consequently, the market is not overly concerned with the elections. Economic growth has been strong and the Atlanta Federal Reserve is expecting GDP to come in at 4.4% on Friday. That is a very strong number. China will post its official PMI over the weekend and the economic calendar is full next week. The market rally has been very narrowly defined. Amazon and Apple have accounted for 30% of the S&P 500 gains this year. This is not a healthy backdrop and we won't have a sustained rally without broad-based participation. When we don't get a market drop in September/October, the year-end rally tends to be small. That pullback attracts buyers and the momentum slingshots stocks through the prior high. If we don't see a decline in the next few weeks, stocks will gradually float higher into year end and we might make it to SPY $300. Swing traders need to use SPY $290 as an intraday stop. As the market moves higher we will raise our safety net. If the reaction to the FOMC statement today is negative, we might hit our stop. If we do get stopped out we will wait for a better entry point. Day traders need to be very cautious this morning. The action will slow down after the first hour and we will be "dead till the Fed". Wait for the dust to settle after the announcement and follow the momentum. The market is hungry for news and today's statement should have legs for the rest of the week. I will not be posting market comments Thursday or Friday. . .

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