The fact that the S&P 500 finally made a convincing break for the border and finished at an all-time high on Friday may have some investors scratching their heads. Yes, there was a deal reached to extend Greece’s loan by four months. However, haven’t we seen this movie before? Isn’t this agreement just the prelude to the next disagreement over terms/verbiage that will end with a resounding “Nein!” from the Germans? Aren’t there oodles of details that still need to be worked out?
The answer to all of the above would appear to be, yes, as we have seen the drama in Greece play out over and over again since 2010. However, the key takeaway from the latest Greek mess is that the market didn’t seem to care all that much about the possibility of a “Grexit,” a contagion in rates, or the potential for banks to begin imploding in Europe. No, this time around, the situation in Greece looks to have been merely a distraction.
So, unless Mr. Tsipras decides to do something really dumb (which by most counts, should have already happened if it was going to happen), investors can turn their attention elsewhere. Yep, that’s right, we’re calling it. You no longer need to keep your eyes glued to the news wires for the latest headlines, comments, or rumors out of Greece and Germany.
In fact, one can argue that the price action on the S&P 500 has declared this crisis to now be officially over and done.
S&P 500 – Daily
However, this does not necessarily mean that things will be peachy keen from this point on. With Janet Yellen scheduled to appear on Capitol Hill for her semi-annual review of monetary policy, it is a safe bet that the focal point in the markets may turn to Fed.
An Oldie But a Goodie…
To be sure, focusing on the Fed is as old as the hills. And by now, everybody in the game knows that the focus will be the question of when we can expect the FOMC to start hiking interest rates.
Up until recently, the consensus expectation had been for Ms. Yellen to begin announcing a series of teeny, tiny rate increases in June. After all, the “considerable time” language, which Yellen herself admitted to be Fedspeak for a time frame of six months, had been removed recently. And with the jobs data continuing to surprise to the upside, most analysts had expected the “liftoff” for rates to begin at mid-year.
However, that was before the data in the U.S. started coming in on the punk side. That was before oil crashed, taking commodities and inflation expectations down with it. That was before growth rates in places like China and Europe began to get noticed. That was before central banks around the world dropped the flag on the race to zero in the currency markets. And that was before the Fed had publicly admitted to being concerned about things like the dollar and global growth.
What About Jobs?
If you will recall, the Fed’s trigger for removing ZIRP (zero interest rate policy) had been the state of the jobs market. Unless and until the economy returned to “full employment” Ms. Yellen and her merry band of central bankers have felt that juicing the economy with low rates in order to stave off even the slightest chance of disinflation, was a good thing.
But… It is important to recognize that by mid-year the unemployment rate will likely be in the FOMC’s range of full employment. Thus, the question of the day then becomes, do we really need rates at zero with the economy at full employment?
Do we really need ZIRP and all of the potential unintended consequences with wages rising? Much of the evidence we’ve seen lately shows that the jobs market is actually much stronger than the national data indicates. And lest we forget, Wal-Mart’s recent announcement on wages may have been the best indication yet of what is really going on in the labor market.
However, with inflation still below the Fed’s target of 2% (which, to anyone who was around in the early 1980’s, is simply comical) Ms. Yellen’s bunch has “cover” to keep rates low for as long as they’d like. You see, there is enough fear about the potential irreparable damage that a premature rate hike could impose that the FOMC may decide to just to sit on its hands for a while longer.
So, while Ms. Yellen will likely talk a good game this week on Capitol Hill about the possibility of a rate hike in June, the current consensus is that rates won’t begin to rise until September.
As such, traders may begin to look for something else to focus on – such as oil, which is down about 4% this morning!
Turning to This Morning…
The weekend news flow has been primarily about Greece. While there is a mountain of details that still need to be cleaned up, the fact that the Euro group’s finance ministers have given Greece four months to work things out means that this situation can now be placed on the back burner. This means that all eyes will now shift to the Fed and the U.S. economy. On the latter front, it is a positive that the West Coast ports dispute was finally resolved. However, brace yourself for some additional punk economic data on the coming month as there has been an awful lot of stuff sitting on boats off the coast of California for some time now. Estimates are that it will take between two and six months to clear this logjam. And with Ms. Yellen’s semi-annual testimony before Congress slated for this week, it is a safe bet that the Fed will once again be a topic of discussion around Wall Street’s water coolers. Finally, oil is back below $50 this morning and U.S. stock futures are pointing to a soft open on Wall Street today.