Well, the Fed has taken a major step toward reducing its balance sheet. In the process, they acknowledged the U.S. economy has the wind in its sails and should only pick up moderate gale force. It’s perhaps not gale winds, in fact, the fed seems very guarded when it comes to growth projections, which actually peaked this year and should drift through 2020.

Economic Projections	2017	2018	2019	2020
GDP	2.4	2.1	2.0	1.8
Unemployment	4.3%	4.1%	4.0%	4.2%
Inflation (core)	1.5%	1.9%	2.0%	2.0%

 

I’m not buying into their model on economic growth or inflation (how long will wireless telephone service stay in this transitory limbo?).  I’m sure they would rather err on the side of underestimating than being too optimistic.

On that note, however, the Street wasn’t too happy to see 11 of the 16 policymakers ready for one more rate hike in 2017, which is a significant increase from only eight in June. It seems to belie their slower growth/lower inflation narrative.

Remember, the market is cool with higher rates as long as it’s based on proven economic trends instead of projections and whims.

June 2017: Addendum to its Policy Normalization Principles and Plans

Ironically, the Fed also laid out its plans to normalize their balance sheet, which seems to reflect their anticipation of a stronger economic backdrop with the Fed’s official projections.

My back- of-the-envelope math puts the Fed balance sheet at $1.0 trillion by the start of 2024. That seems like a long time from now, but their schedule is actually aggressive with rosy long-term assumptions.  

Plus, $3.5 trillion is unwinding in unchartered territory.

 

Monthly Caps on SOMA Securities Reductions
Time Frame	Treasury Securities	Agency Securities
Oct – Dec 2017	$6 billion	$4 billion
Jan – Mar 2018	$12 billion	$8 billion
Apr – Jun 2018	$18 billion	$12 billion
Jul – Sep 2018	$24 billion	$16 billion
Oct 2018 –Beyond	$30 billion	$20 billion

Once the market digested the comments and contradictions, the market found its footing as it rallied into the close. The Dow and S&P 500 hit new highs, but the Russell 2000, which is more representative of Main Street America, outperformed on Wednesday.

I’m watching to see if the crude oil rally continues.  Yesterday, crude popped even as crude inventories climbed more than projected. The move underscores a greater belief that the Organization of the Petroleum Exporting Countries (OPEC) will extend supply limits and (mostly) adhere to their promise.

While there is a declining supply dynamic in global crude, there is also the influence of demand, which reflects the rising tide of prosperity around the world.

Petroleum Inventories	Actual	Estimate
Crude	+4.6 million	+3.5 million
Gasoline	-2.1 million	-2.1 million
Distillates	-5.7 million	-0.2 million

 

Today’s Session

Stocks are looking higher into the open but volume should be lighter than normal as Rosh Hashanah begins this evening.

I’m watching for some profit-taking from high flyers and rotation into laggards, especially small cap names connected to the domestic economy.  On the international front, there are rumors President Trump will decertify the Iran Nuclear deal, as reports have surfaced that he might have the support of France. 

Overall the market is consolidating gains with an upside bias, going into the fourth quarter that bodes very well. 

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