Fed Hike in June: Sell in May Bring Dollars Home to Safety

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Maybe the Fed is not such a tool of the government. Today’s release of the FOMC minutes from the last meeting on April 27 suggested that a rate hike in June is quite possible. Inflation, retail sales, disposable income and the dollar index are on the rise in conjunction with a firm labor market. The word June was used 8 times in the minutes in close proximity to the increased possibility of a rate increase, “leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting.”

Last month in our Market at a Glance published on 4/28/2016, we noted that “As widely expected, there was no rate hike at the Fed’s latest meeting. Based upon the CME Groups FedWatch Tool, the closest month with a probability of a rate increase exceeding 50% is September. Considering recent market gains, stabilization in commodity and foreign markets and strength in the U.S. labor market, this could be an overly optimistic outlook. A 0.25% rate hike before elections in November would definitely show the Fed is not as political as everyone thinks (or just confirm it for some).”

In our May Outlook: Rally Stalling At End of Best Six Months, Time To Get Shorty out on the same day as The Glance we said, “Perhaps a surprise hike from the Fed in June might be the straw [that will knock the market down]. While the FOMC cleared the way this week in their announcement for a hike in June, the futures market has the odds very low. Many pundits have been haranguing the Fed for not being independent or prescient. So maybe June is the time the Fed stakes its ground and hikes a quarter point….”

Yesterday in our Mid-Month Update: Selling in May Persists, Prepare For NASDAQ MACD Sell Signal we suggested, “The Fed is on the verge of raising rates again, and it may surprise with a hike in June or July as inflation just up-ticked more than it has in the past year.”

Our astute colleagues at S&P Global Market Intelligence Investment Policy Committee headed by the venerable Sam Stovall noted today that “Firm economic readings, combined with more hawkish Fedspeak, have increased the possibility of a rate hike in June… Even though market prognosticators have been heard to proclaim in public or in the financial media that the Fed typically doesn’t play politics by hiking rates ahead of a presidential election, history begs to differ…, the FOMC raised short-term rates six times in the third quarter of presidential election years (1948, 1956, 1980, 1988, and twice in 2004).”

Higher rates often create a stronger currency. So perhaps the current rise in the Dollar Index is more than just the usual seasonal move and telegraphing another rate increase from the Fed at the next meeting in June or the one after that in July.

Read this article in its original format at AlmanacTrader.com

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