The FOMC statement released after the meeting last week was a bit of a shocker, about as hawkish as you are likely to get from that cooing group. It was intimated about as strongly as one can intimate something without actually saying it, that they expected to be hiking rates at the December meeting. Well, as long as the labor market continues to improve and they feel comfortable that inflation will get back up to their target of 2%. Based on the economic data released last week I wonder if somehow the Fed has confused its economic models with reality, if they’ve accidentally been watching the wrong dials on the old economic fine tuning machine. For there was almost nothing in that data that suggests the Fed’s goals, its requirements for raising rates, will be met in the next 60 days.

In fact, the data released last week could have easily been cause for alarm at the FOMC as the housing market data showed a definite slowing in the last month. Housing, along with autos, has been one of the few bright spots of the economy over the last year, showing pretty steady improvement. New home sales were down month to month, August was revised down significantly and the year over year change is less than 2%. Pending home sales were also down on the month.

The manufacturing data released last week was also pretty grim with all but the Chicago PMI continuing to point to more weakness. Durable goods orders were down again and last month’s lousy number was revised even lower. Core capital goods orders were off over 7% year over year, a number completely at odds with the FOMC statement that “business fixed investment ha(s) been increasing at solid rates in recent months”.

The committee characterized “household spending” as also “solid” something hard to square with the personal consumption numbers also released last week. Neither personal income or spending moved much more than a rounding error and the Fed’s preferred inflation gauge, the PCE deflator, was up only 1.3% year over year, quite a ways from the goal of 2%. The FOMC is no doubt trying to look through the gas price drop that is affecting the numbers, something all of us are trying to do, but I would just point out that gas prices haven’t change much since August so I’m not sure this latest data can be “blamed” on lower gas prices.

The market reaction to the statement was just as confused as the statement itself. Stocks gyrated pretty wildly after the statement was released, finally closing higher on the day. The rally didn’t last long though as the BOJ left its QE program unchanged, a bit of a disappointment for the competitive devaluation cheerleaders. Stocks settled the week barely changed, up less than 0.5%. Bonds were a bigger loser on the week with the 10 year Treasury up about 7 basis points.

The movements of the dollar were perhaps the most interesting, While the bond market at least seems to be pricing in some probability of a hike, the forex market doesn’t not seem to buy the idea. The dollar was down on the week and despite the move higher after the ECB meeting is up a mere 0.5% on the month. Gold, did react negatively, down almost 2% on the week, but the trend there is still higher with gold still the best performing of the major asset classes over the last 3 months. Also of note was that the general commodity index ETFs were higher on the week. Are commodities finally making a bottom? Or stated differently, is the dollar peaking?

Stocks did have quite a good month, up over 8% for the S&P 500, but are still struggling, up a mere .75% over the last six months. Still, though, the best house in a bad neighborhood, that meager return the best of the major global indexes. The recent rally has certainly turned the sentiment in favor of the bulls at least for now, but the rally may be a case of less than meets the eye. Just 51% of stocks in the S&P 500 are trading above their 200 day moving average. Momentum has not confirmed the rally either, merely cleared the previous deeply oversold condition. Even after this big move, intermediate and long term momentum indicators still favor bonds and gold over stocks.

Another area we’ve seen some improvement since the last Fed meeting – and much more important than stock prices – is credit spreads. Spreads narrowed across the credit spectrum during October and unlike stock prices, that could have an impact on actual economic performance. The narrowing in the last month though was not sufficient to change the trend which is still pretty obviously toward wider, a distinct negative for corporate borrowers. And there is a plethora of those borrowers as the M&A market is on fire with debt fueled deals driven by a desperate search for revenue and earnings growth.

On that front, earnings season has offered little comfort. With 340 of the S&P 500 having reported so far, earnings are down 2.2% according to Factset. Yes, companies are generally beating reduced expectations, but if this holds for the quarter it will be the second consecutive quarter of declining earnings. That, by the way, is in Factset’s way of looking at those profits. If one merely uses reported earnings – earnings according to GAAP and before companies have a chance to massage them for public consumption – this would be the 4th consecutive quarter of declining year over year earnings. For those looking for an earnings recession, I think we have made contact.

The GDP report last week showed the US economy expanded at a 1.5% annualized pace from the 2nd to 3rd quarter. The year over year change in real GDP was a mere 2.0%, a number that is a downshift from recent quarters but well within the range of this meager expansion. Nominal GDP – not adjusted for inflation – was up a mere 2.9% a number not previously seen outside recession.

Yes, the economy is still expanding but contrary to the FOMC statement there is little that is “solid” about it. Most recently the best parts of the economy have been the interest sensitive sectors, housing and autos, a fact that should make the Fed at least a little uncomfortable as they prepare to make those items more expensive. The Fed has spent over a year telling the world they intend to raise interest rates. Think that might have had an impact on home and car buyers? How much of the recent strength in those sectors is because buyers are getting ahead of the rate hike?

Will the Fed hike before the end of the year? I’ve said all year the economy wouldn’t be strong enough for them to raise rates and I’m sticking to that but frankly I don’t think it matters much whether they do or don’t. The economy isn’t performing that well with rates at 0 to 0.25% and it probably won’t be any better or worse at 0.5%. Besides, does anyone really think the Fed is “hawkish”, that they are about to go on a rate hiking spree? They may yet prove me wrong about this year and hike in December but if they do bet on one and done. The economy can’t handle higher rates.