The Shot (Not) Heard Round The Fed

| About: SPDR S&P (SPY)

Summary

We were unimpressed by the amount of change in this FOMC report versus the last report.

The market (short squeeze) was very excited about the jobs change on July 8th. We're still not.

We think the Fed's language could mean that GDP continues slow.

That would be a stock market negative.

Oh by the way we'll know about GDP on Friday.

Summary

As we wrote in the last two weeks, we thought the recent Wall Street Journal ("WSJ") article was a Fed plant. The Fed was amazingly silent except for that article. We expected a nice change in language this time in the FOMC statement based on the WSJ piece. That said, we were unimpressed with much change despite the huge jump in July 8th's labor number. The Fed clarified that number for us as well.

We would guess that the change in language that didn't change could mean that Friday's GDP number could be weak. The economy may not pick up in jobs and GDP. Inflation is picking up however. We think that underlying fundamental backdrop is for stock market risk (NYSEARCA:SPY).

Let's review what we see as the major change to the Fed statement.

This time they said, "economic activity has been expanding at a moderate rate."

Last time they said, "economic activity appears to have picked up."

Wait a minute, wasn't there just a monster jobs number July 8th? Should that "picked up" be something a little more exciting this time like "wow?" Nope. All we got is zzzzzz "moderate rate."

That's not good. How much is moderate to you? I would say .5%-1.5% is moderate. 2%-3% is decent and if they said "barn-burner" in their release I would say 3.5%. Fair?

Let's look at GDP and let's consider there will be an estimate of GDP reported on Friday. They may have had that number in hand when meeting this time. It's only two days away and very important.

Here's GDP so far. It's slowing.

Click to enlarge

I'm going to ask you, with that July 29th GDP number in your hand what would "moderate" mean? 1%, 2% max?

Estimates are for 2.6% this Friday.

Graduate school level question: Does 2.6% GDP up from 1.1% equal "moderate?"

If this isn't clear what I am about to say to you then I don't know what, but if GDP on Friday was in my hand at anywhere close to 2.6% I would continue to say in my release "picking up."

Why? Because 2.6% would be "picking up" from 1.1% or 1.4% or 2%, any of the last three quarters. Fair?

If GDP was close to 2.6% on Friday Elazar's Fed statement would read like this.

"Economic activity continues to pick up."

Or I may have left last statement's language alone. They did not. They slowed that language to "moderate." That's not good.

And Now For The Official Fed Excitement Over That MARKET BREAKOUT jobs number July 8th.

Here's what the Fed said to clarify the strength of July 8th's jobs report. "Job gains were strong in June following weak growth in May."

They clarify that the June strength was because of May's weakness. Like we've been saying, you have to take those two numbers together. That fixes the Verizon (NYSE:VZ) strike wiggles. That is a slowing story. Let's look at it.

Click to enlarge

The 11 and the 287 (last two months) are averaged to 149. That's versus 144. That smooths the strike. Those three months, in perspective, are SLOWER than any time in the last year.

That's why the Fed clarifies it. It's not so strong.

Chance For A Rate Hike In September, No Way

I'm sorry I don't see HOW they raise rates in September based on this report.

Let's review what the WSJ said a few weeks ago.

The title of that report was "Fed Officials Gain Confidence They Can Raise...As Early As September." (Go look. Pretty specific).

Here's what the WSJ said in the body of that article.

"But the message in their post meeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead. Such a message would get the attention of traders in futures markets, who see low chances for the Fed moving as early as September."

I have a question, Did the Fed get "the attention of traders in futures markets...[for a rate hike] September."

We can find out. Let's go to the videotape (For ESPN fans).

Click to enlarge

Did anybody see any traders running around in insane hysterics today in the Fed futures pits over the post meeting messaging? I didn't. To prove it let's look at this chart. The last green dash is today. Nope no change what-so-ever.

Nobody got anybody's attention today. I am sure of that.

I'm still shaking my release though to see if something falls out to get my attention. Maybe I missed something.

"Moderate." Oh there it is, oh no, it's out of hand, did you see the word, "moderate." Everybody run!

"Risks..Diminished"

One pickup, to be fair was that they said, "Near-term risks to the economic outlook have diminished." We think that is an update from last time's, "The Committee continues to closely monitor... global economic and financial developments."

If we Elazarize that we think it means, "The Fed saw stocks hold up after Brexit."

We don't think that qualifies as the "shot heard round the Fed."

If the WSJ (Plant) meant that the screaming language to wake up traders in the pits from their lethargy was the words "pick up" would change to "moderate," then I missed it.

This is more dovish than what the WSJ had us expect.

We are now going to defend the Fed and the WSJ because we love them both.

The only way we can make sense of it is if that GDP number is going to disappoint to the downside this coming Friday. Otherwise we can't make sense of it.

Jobs picked up because of the strike. It made the Fed more excited. They leaked to the WSJ "confidence."

But we think that may have all changed once again.

To all the commenters that had it right, OUR HATS OFF TO YOU. But we will see Friday. If Friday is weak we will know why the Fed changed the expected change of their language. Because, just like the rest of the world, the US is slowing too.

Inflation Up-tick

That said, their inflation language did get an upgrade. Let's look.

Here's what they said last time. "Market-based measures of inflation compensation declined"

Here's what they said this time. "Market-based measures of inflation compensation remain low"

Remain low is stronger than decline. We'll show you how much stronger. Let's look at PCE their core measure of inflation.

Click to enlarge

This is the Fed's main measure of inflation. This "remains low" in Elazar jargon is "JUMPING" with a capital J. Tell me no, please tell me no. Ok, it's two months data. JUMPING.

Job market slow but tightening, which is also inflationary

We would also say their addition of "increase in labor utilization" means that although jobs are not picking up the job market is tight. We think that is because the labor pool is shrinking. That is also not growthy but rather inflationary (College students reading this, please don't use "growthy" and other Elazar made-up trader terms in your essays.)

Here's the shrinking labor pool tightening the labor market even though jobs are slowing. We think the Fed has now figured this out.

Click to enlarge

Here you see that despite low UNemployment the economy is not picking up because the labor pool is shrinking. This is also not good. The economy slows but utilization of what's left in labor is tight and inflationary. That's a nation of stagflation.

That's not a fairy-tale "goldmansachsilocks" backdrop for a bull markets.

(Picture: Here's the famous fairy tale character Abbyjosephcohenilocks once of Goldmansachsilocks which was of course coined for the market when it was in its heyday 90s. We don't think rising inflation and slowing growth qualifies for an official Elazar fairy tale rating.)

If A Rate Hike Happens To Be Still On The Table Look Out

After all this if the Fed leaks that a rate hike is on the table for September, we have a huge problem. Why, because this doesn't appear that good to deserve a rate hike. A rate hike will slow a "moderate" economy to less than "moderate."

Conclusion

The Fed is more dovish than expected. Their growth assessment seemed to slow and their inflation assessment took a slight tick up.

We think the change from the WSJ excitement to today could show up in Friday's GDP number being less than the not so "moderate" 2.6% expectations.

We think the stock market has downside and is up because an unprecedented short squeeze post-Brexit.

Please stay safe.

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Disclosure: I am/we are short SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.