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While I'm ahead and on track, I'd like to venture further to say that the Fed may have already decided to pause its rate hike after another 0.25% increase on Tuesday. The Fed could also just stop without adding that 0.25%, but that would be too abrupt. The Fed has become more politically inclined in recent years. Hurricane Katrina catastrophe has now become a political event. It’s only politically correct for the Fed to pause its rate hike. In addition, the money supply shows no sign of significant increase in the aftermath of Hurricane Katrina. This appeared to be a probable setup for the Fed to pause its rate hike. Unlike the $180.5 billion surge in M3 immediately after the 9/11 terrorist attack, this time, M3 only increased $32.4 billion for the week ended Sept. 5, 2005. This was less than the Pre-Katrina big increases of $33.9 and $60.5 for the weeks ended Aug. 15 & Aug. 22, 2005. Incidentally, M1, the most liquid forms of cash, had also declined by $24.3 billion. Another setup was the decline in the Fed’s repo activities. Last week’s total of $37.55 billion was the lowest since June. And, yes, this total included the Treasury, the Agency, and the Mortgage Backed. Here’s an interesting development. The total amount of bids submitted continued to decline and stayed below $360 billion (Chart 1). This indicated that the banks lending activities might have slowed down. And, that’s one more reason for the Fed to pause. While both the economy and the stock market are slowing down, why not seize the opportunity to pause the rate hike? It'd be a popular move. This, of course, could send the gold prices much higher. It may just reach the $470 level as quickly as next week. Usually, this could also boost the stock market higher except that this time it may be different.
For one thing, the Retail sector is no longer leading the charge as it did when the market rallied in May, June, and July. All the corporate profits and productivity mean very little if there's no consumption. And, the retail sector is most directly affected by the change of the consumption. This was the chart I posted for my Sunday Chartmentary on 8/14/2005. And, this was what I wrote then: "the S&P Retail Index appears to be ready to return to the equilibrium after feasting on the Fed’s post London bombing liquidity for about a month."
The red circle on Chart 3 below shows what's transpired after that 8/14/2005 Sunday Chartmentary. RLX has dropped almost 5% since. Looking back now, it still seemed unreal that the retail sector could've fallen this much with all the momentum it had built from May through July.
Another sign of the declining consumer demand is the the declining imports of consumer goods. According to the Sept. 13, 2005 release of the International Trade report, July's imports of consumer goods decreased by $768 million from June (Chart 4). This was the third month in decline, and I'm sure we could call it a trend now. Unless all of a sudden we started manufacturing garments and DVD players domestically, this declining trend of imports supports further deterioration of the retail sector, and consequently our economy. And, this is one reason that the Fed's pause may not make much of a difference for the stock market this time.
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