Will The Market Force Yellen Into ‘None-And-Done’?

The market has a way of getting what it wants. And right now, it surely does not want Yellen to hike this week. Will she nevertheless, as is widely expected? Or will the buoyant markets force yet another delay, ultimately resulting in a ‘none-and-done’?

There’s no denying that the Fed policies fueled this stock bull market. The liquidity of QE 1 to 4 propelled the markets to new highs with every shot. At the completion of the QE tapering in October 2014, the S&P 500 hovered around the 2,000 mark. Today, we’re trading at exactly the same levels. No QE, no advance.

Leon Cooperman, manager of Omega Advisors, argues that interest rate hikes are positive for stocks. That might historically be the case. But this time around, things could be different. We know, that’s the most dangerous sentence in the world. But this is not your average business cycle. Nowhere near. The cumulative GDP-addition since the end of the financial crisis might be equal to the the point of prior rate hike cycles, as bond king Jeff Gundlach pointed out early last week. But there’s barely GDP growth to be found.

Also, inflation usually picks up in the late expansion of the business cycle. Commodities outperform as the slack in the economy diminishes. That’s the point where the Fed normally starts tightening. Right now, we’re looking at the worst commodity crash in decades. Inventories-to-sales are rising as well. The yuan is plummeting. There is just no slack.

What about the job market? Isn’t the unemployment rate at the 5% target? Well yes, it is. And at first glance, it’s looking much better than Europe’s 9% unemployment. But wait a second. If we adjust the unemployment for the participation rate, like GMO’s Jeremy Grantham did recently, we’re looking at worse employment figures in the US than in Europe. While even counting in Italy and Spain. You know, the same Europe where ECB-president Mario Draghi just put the QE-pedal further to the metal.