What Will Yellen's Final Reign Look Like?

October 1, 2017

Mish's Daily

By Mish Schneider

blankThis week, Yellen will once again takes center stage.

She speaks on October 4th. Furthermore, Friday the employment number releases.

Word on the street is that the number of new jobs will be impacted by the recent hurricanes. Yet, predictions for the overall unemployment rate at (4.3%) remain intact.

Last week, she said that low inflation is a mystery to her. Agreed.

Any of you who honor me by reading this Daily consistently, know that I too am baffled by continuing low inflation.

Yellen believes that inflation will soon head higher. She speculates that higher wages will spark a rise in commodity prices.

Perhaps. I see more geo-political and weather reasons for an inflation spurt.

Regardless, the most fascinating part of Yellen’s reign to me, is the potential termination of it.

With candidates such as Ronald Lauder, Gary Cohn, John Taylor, John Allison, Richard Davis, Glen Hubbard and Kevin Warsh in the running, one wonders whether Trump will go with a hawkish or dovish Fed Chairman. (Not to mention a distinct absence of any women in the running.)

In contrast, nearly ¾ of 56 Economists surveyed, support a second term for Yellen.

What would I do if I were Yellen, given an uncertain environment for her future whilst the market surges higher?

Beginning with the U.S. Dollar, a rise in rates will be bullish for the dollar. This is a double edged-sword.

For Yellen, raising in December or before means more pressure on commodities as a stronger dollar makes raw materials more expensive.

Nonetheless, if she is either convinced that inflation will heat up or she cares more of her commitment to reducing the balance sheet-she will raise.

Next, a stronger dollar means the cost of borrowing increases. The cost of paying back debt also increases.

Real estate developers pay more to carry financing until the projects are completed. Not so good for real estate developers with huge debt to pay back, if you get my gist.

Finally, a stronger dollar is good for domestic retail.  The impact on American goods overseas? Not so much.

All the above could motivate Yellen in two ways.

First, to keep the status quo, it’s her gradual and gentle policies that have made the current administration happy.

Maybe she is thinking that any disruption to the status quo-whether it’s her at the helm or not-will unhinge her legacy.

Or, maybe she’s thinking that her legacy is solid-after all, she will be recorded in the history books as the presiding Chairperson over historical prices in the stock market.

Second term or not?  If I were her I’d lean more towards probably not.

Therefore, her legacy may matter less to her than the plan of weaning the market off the low interest rate dependence before she’s done.

Last week, the dollar confirmed a recovery phase on the daily charts.

On the weekly charts, the dollar remains in distribution with the 200-week moving average at 24.30 or last week’s high.

Watch the dollar and the 20-year Treasury Bonds. If you believe as I do that price tells all, look for a move in UUP over 24.40.

Similarly, keep your eyes on a drop in TLTs price to below last week’s low.

For the time being, Yellen may continue to dress as a monarch. However, she could metaphorically stick her tongue out while thinking, “Nah, nah, nah-nah, nah!”

S&P 500 (SPY) 250 pivotal support with this on new highs.

Russell 2000 (IWM) Last Tuesday I dressed up as Granddad and showed you a chart that the top of the monthly channel would yield a big move up should this clear 145. That is now the support level to hold

Dow (DIA) 223.97 the high to take out. 222 first level of support

Nasdaq (QQQ) 145 is big support to hold now as this is still some ways from the recent all-time high.

KRE (Regional Banks) Interest rate sensitive as in wants to see Yellen stick her tongue out and raise. 56 pivotal support

SMH (Semiconductors) New highs last Friday. 91.50 support to hold

IYT (Transportation) 175.75 pivotal support to hold

IBB (Biotechnology) Bull flag breakout. Now, 331-332 big support.

XRT (Retail) 41.75 the 200-DMA. 42.23 big weekly resistance to clear

IYR (Real Estate) See-saw action within a channel going back to February.

XLU (Utilities) 52.00 big support and a decent area to probe long.

GLD (Gold Trust) 120.80 support with a move back over 122.91 much better

GDX (Gold Miners) 22.80 support to hold. A move over 23.48 time to consider.

USO (US Oil Fund) A weekly close over 10.47 good.

XLE (Sel Energy Spdr Fd) 68.65 the 200 DMA

OIH (Oil Service Holders) 25.40 should not hold

TAN (Solar Energy) 21.00 major support to hold. Resistance at 22.00

TLT (iShares 20+ Year Treasuries) 126 resistance with under 123.97 see 122.60 then 119.00

UUP (Dollar Bull) 24.30-40 big area to clear and 24.00 pivotal support

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