Capping a 3.5% decline for the week ending Dec. 11, the Dow Jones Industrials plunged 1.77% today, dropping to 17,264, nearly 1,100 lower than the high reached 18,351 May 19. Since that time, Federal Reserve Chairman Janet Yellen has been holding the Sword of Damocles over markets, threatening to start hiking rates by the end of 2015. Begged by International Monetary Fund Managing-Director Christine Lagarde to hold off on rate hikes in 2015, Yellen has been busy reading the tea leaves Dec. 4, adding 211,000 non-farm private sector payroll jobs, dropping the unemployment rate to 5.0%. While it’s true that the drop in unemployment and jobs picture looks rosy, it’s also true that could change quickly. Since former Fed Chariman Ben S. Bernanke dropped the federal funds rate to zero-to-a-quarter percent Dec. 16, 2008, the U.S. economy has made a slow recovery from the Great Recession.
Pressure from Yellen’s Fed governors stems in part from the need to see how the economy functions with less stimulus. After trillions in bailouts since 2008 and the lavish bond-buying program known as quantitative easing AKA QE1, QE2 and QE3, Yellen ended the Fed’s bond-buying Oct. 29, 2014. Today’s global economic slowdown, started in China but spreading to Europe, spells eventual trouble for the U.S. economy. Lagarde asked Yellen to hold off on 2015 rate hikes to wait-and-see how deep the slowdown goes in Asia and Europe. Bailouts in Greece and floods of Mideast refugees in Europe have also dampened economic expectations, asking Yellen to take a bigger perspective. Market sell offs hint at things to come. If Wall Street continues to short equities, it won’t take long for hiring freezes and corporate layoffs, leading to a slowdown in U.S. GDP growth.
Instead of focusing on the unemployment rate and jobs numbers, Yellen and her Fed governors in the Open Market Committee meeting Dec. 15 should look at the 0.2% inflation rate, barely staying above deflation. If hiking rates next week kills Wall Street’s bull market, leads to layoff and pushes the U.S. economy back into recession, then it’s well-worth listening to Legarde and other economists seeing no justification for hiking rates. With the inflation number so low, it means that today’s low unemployment doesn’t reflect the low-quality and part-time jobs keeping most consumers from fueling U.S. GDP growth. Dropping to 15 cents, the Chinese yuan continues to show weakness against the dollar because of sluggish economic growth. With manufacturing and consumer spending slowing in China, there’s no way to stop the trend from spreading to the U.S. and Europe.
Plummeting commodity prices, especially oil trading at 35.48 a barrel, doesn’t bode well for petroleum-based economies. With the Islamic State of Iraq and Syria flooding the market with cheap Iraqi oil and with Iran’s sanctions lifting, the long-term prospects for oil don’t look good, hinting at a slowdown in world energy markets. As China’s economy slows, demand for oil and refined products follows suit. “It hasn’t been any one thing today. It’s been an accumulation of concerns as the week has worn on,” said Michael James, managing director of equities trading at Los Angeles-based Wedbush Securities. James knows that even a token rate hike from Yellen next week could trigger an avalanche of short-selling, driving down market averages. “Positioning has been clearly along the lines of taking risk exposure off,” said James, hinting at more short selling next week.
Locked in fierce battle for the GOP nomination, there are plenty of complaints about President Barack Obama’s incomplete economic recovery. If markets continue to sell-off into next year, it’s going to make a strong case for the GOP heading into the presidential election. While Democratic and Republican candidates like to rip Obama’s economic growth, neither party is willing to add to the government payroll. Nobel Prize-winning Columbia University economist Joseph Stiglitz has urged both parties to add government jobs to boost the struggling middle class. Neither party wants to come to grips with what must be done to fix the sluggish U.S. economy. Adding more minimum wage and part-time fast-food jobs does little to boost GDP growth, something dependent on jobs with good wages and benefits found in the government. Before Yellen pulls the trigger next week, she needs to look at the inflation number.
Wall Street knows how to make money buying-and selling and selling-and-buying. But if the shorts dominate the market, it’s going to hurt corporate profits, lead to layoffs and cause a drop in U.S. GDP. Traders linked to energy also see dark storm clouds ahead. “Until the oil market finds a support level, the market will remain unsettled,” said Art Hogan, chief market strategist at New York City-based Wunderlich Securities. Slowdowns in China and Europe reduce overall demand for oil. With OPEC refusing to slow production and Iran returning to the market, it’s doubtful oil prices will rise anytime soon, further depressing energy-related businesses. All of these deflationary pressures should give Yellen, no matter what the pressure, reason to pause on hiking rates in 2015. Killing the year-end rally and risking recession in 2016 are reasons enough to put Fed rates hikes on hold.
