Grind into Fed and ECB

So here we go again, per usual.  The grind higher, as investors sell volatility and get complacent.  That is why you can't short early in the SPX, because it will go up slowly with no pullbacks and cause gradual, continuous pain.  Its better to be a little bit late to avoid the misery, even at a less optimal price point.  I haven't done much with SPX over the past couple of weeks, it just isn't worth it for a bearish trader at this juncture.  The re-risking off the deep dips in February and April is mostly complete.  Perhaps there is a bit more of a rally after the Fed and possibly a false breakout above 2800.  That would be a point to leg into a short, adding more when the rally stalls out and starts getting choppier. 

As quickly as the Italy headlines rocked the Treasury market (less so the equity index) higher, it has faded and all of a sudden, Italy has issued a EU compliant budget.  The PIIGS have been neutered and are walking zombies at this point.  Bad enough to cause populism, not bad enough to leave the euro.  The European economy is moribund, what happened with the bump up in GDP growth to 2.7% was Europe's version of running hot.  That is as good as it gets over there, with the EU budget mandates eliminating any possibility of a big fiscal stimulus, and monetary stimulus is maxed out with QE and negative rates.  At this point, only a helicopter drop by Draghi with an FU towards the Germans will get the EU towards higher growth rates. 

The German Bund has sniffed this out well ahead of any Italian headlines, because it peaked out at 0.80% in February, and the yield has been going lower ever since.  The next global slowdown will be the final nail in the coffin for the EU, as it officially enters Japanese zombie economic status. 

But it could actually be worse in the EU over the next decade than it was in Japan.  At least Japan could use fiscal stimulus to somewhat offset the slower domestic growth rates.  The EU with their budget rules, all but binds member states to strict guidelines on budget deficits, eliminating that form of stimulus.  That leaves monetary policy as the only form of stimulus, and it is mostly maxed out, unless the ECB starts buying up European stocks, which is very unlikely with the next ECB president likely to be German. 

Today we have the FOMC meeting and tomorrow the ECB.  With stocks grinding higher, but with CPI numbers contained, I expect the Fed to come out with the status quo, similar to March, and not lean dovish or hawkish.  It probably will not live up to the hype of a press conference meeting.  Powell seems to be a market follower, not a leader, so I don't expect him to rock the boat today.  Getting the Fed to this point of raising 25 bps every 3 months hasn't been easy, so I don't expect them to tamper with market consensus which is still leaning towards 3 hikes this year, not 4. 

The ECB is stuck between a rock and a hard place.  They want to end their QE program, but the economy is stalling out so they will try to do it as gently as possible.  I don't expect any tape bombs from Draghi, the European economy just isn't strong enough and Italy and Deutsche Bank will keep them from being hawkish. 

Once the dust settles this week, I expect the SPX to be a little bit higher and bond yields to be a little bit lower.  But over the summer, it should be a different story, as emerging markets and Europe are a canary in the coal mine for slower global growth.  I will get positioned for a move lower, probably late June/early July is the time period for looking short SPX.