Fed Policy

It strikes me that the overall future rate picture and Fed policy future views are totally up for grabs at this juncture.  There will be a bitter fight to control the narrative.  Consider…

1.  Q3 GDP came out very healthy, and Feds Atlanta and NY AS WELL AS Blue Chip economists currently predict Q4 in a tight range between 2.6% and 2.9%.  On the other hand, housing shows continued weakness and other data — consistent with slowing but still well above trend growth —  is good but slightly less robust.  So growth seems okay to still strongish…..supporting Fed-envisioned future rate hikes.  (The only fly in the ointment is the generally good big picture ECRI weekly leading indicator growth series that has been declining since mid-year and just punched down through zero this week.)

2. Inflation measures like the PCE and GDP deflators appear benign, maybe even trending down a bit — as is the ECRI future inflation gauge.  Crude prices have also crashed.  On the other hand, employment and wages are signalling possible trouble on the labor constraint/wage front.  Not clear what the future holds — and delivering mixed signals to Fed.

3. In the world of securities prices, yields of everything from Treasurys to junk rose to near recent highs following the employment data.  And both investment grade and junk spreads (off Treasurys) have been widening (see how prices of bank loan CEFs have been sliding despite the promise of higher floating rates.) If something takes 10yrs up through 3.30%, it could be a fast shot to 3.5-ish%.

SPECIFIC TO CEFS…

  –  Price rises of last week have created an encouraging technical picture with many DAILY MACDs thowing buy signals during this significant retracement from the lows.  And one can argue we saw a well formed double bottom in many FI CEF prices.  HOWEVER, when one steps back to the WEEKLY picture, there suddenly seems to be far less to get excited about —- no encouraging MACD signals at all, and MAYBE we’re forming the general outlines of a new and somewhat lower trading range.

— There is a pretty convincing argument that FI CEF portfolios earning 8%-9.5% will prove to be good investments in the intermediate and long terms —- but I recall saying that with great confidence at levels a full percent lower (and many dollars higher!)  Further….tax loss selling is almost certainly not complete.  

  — Finally, FI CEF discounts — and hence prices — have been surprisingly well correlated with stock index price action.  And it’s really hard to guess where stocks may go with silly speculative trade tweets driving the algos and administration departures/firings and potential Special Counsel indictments lurking in the days following Tuesday’s election.

   — FWIW, I have been itching to replace the stuff I sold last month…sometimes just because the prices seem a lot lower.  But then I look at the TLT head-and-shoulders and the 5yr weekly CEF charts again, and I try to temper my enthusiasm until the new dominant narrative emerges.