The Market Today
Focus on Fed Decision; U.K. Unemployment Drops to 43-Year Low
by Craig Dismuke, Dudley Carter
Powell and Dots in Focus as Fed Poised to Hike Rates for Sixth Time of This Cycle: The FOMC concludes its two-day meeting today releasing its Official Statement and Summary of Economic Projections at 1:00 p.m. CT. New Fed Chair Powell will hold his first post-FOMC presser at 1:15 p.m. The Committee is likely to hike rates another 25 basis points bringing the Fed Funds target range to 1.50-1.75%. In addition, the Fed’s infamous dots are likely to rise.
The two key issues today are likely to be 1) how new Chair Powell handles his press conference, and 2) the degree and timing of the changes to the dots. He is expected to strive for continuity of message with former Chair Yellen at this point, potentially emphasizing the slow pace of “gradual” hikes. However, as seen in his first congressional testimony, crafting a perfectly nuanced message is challenging. Investors will likely be wise to not become overly reactionary to his comments, giving them a chance to be clarified in later speeches.
The second key issue, the degree and timing of the changes to the dots, could prove to have biggest market impact. The Fed has now published 25 dot plots since beginning the practice in 2012. Seventeen of the dot plots showed lower rate projections than the previously published projections. Interestingly, as the Chart of the Day shows, higher or lower projections rarely have a direct correlation with the markets (with the exception of the 2-year Treasury yield). However, given the trading patterns seen in 2018, the dots may have a more tangible impact going forward. Factors to watch regarding the dots include: 1) Will the median dot for YE2018 point to four hikes instead of 3 (it would take four participants who currently project three or fewer hikes to raise their projections to four hikes to move the median)? 2) Will the median dot for YE2019 point to three hikes instead of two (it would require only one participant to raise their projection to move the median)? And, 3) will the 2018 dots or the 2019-2020 dots be increased the most? If the 2018 dots are raised the most, it would imply a faster pace of gradual hikes which would likely have a bigger market impact. If the 2019-2020 dots are raised the most, it would imply that the gradual hikes would simply last longer – something the markets should be able to digest.
February’s Existing Home Sales report set to be released at 9:00 a.m. CT. The report is expected to show a 0.4% MoM increase in sales. Released earlier this morning, mortgage applications for the week ending March 16 fell 1.1% as refi apps dropped 4.5%. On a positive note for future home sales, purchase apps rose 1.4% and continue to show growth on a year-over-year basis.
Yesterday – Yields Rose as Stocks Recovered and Investors Positioned in Front of the Fed Decision: U.S. stocks rebounded Tuesday as traders fine-tuned their frustrations with the technology space to focus on Facebook and other social media megastars. Facebook fell another 2.6% and Twitter tumbled more than 10%, but the S&P 500’s broader tech sector was unchanged. And despite weakness in telecoms and a handful of other sectors, gains elsewhere helped buoy sentiment and lift the broader index by a modest 0.14%. Energy was the best performing sector, up more than 0.85% as prices strengthened across the related commodities complex. U.S. gasoline stocks have been drawn down some and a report cited sources familiar with OPEC discussions as indicating the group believes supply rebalancing is occurring faster than expected. As equities recovered, Treasury yields moved higher as investors repositioned ahead of the Fed’s decision. On the day, the entire curve shifted up roughly 4 bps with the 2-year yield reaching a new cycle-high of 2.35%, the 5-year yield ending at 2.70%, and the 10-year yield rounding to 2.90% for the first time since February 22. The Dollar held its overnight gains that unfolded on weaker data points in the Eurozone (economic confidence) and the U.K. (inflation).
Overnight – U.K. Gilts Lead European Yields Higher After Strong Labor Data, U.S. Yields Little Changed Ahead of the Fed: U.S. equity futures were weaker early Wednesday after global equities traded unevenly in the overnight session. The bigger indexes in Asia a bit weaker and the Stoxx Europe 600 down 0.3% and near its daily low. Treasury yields inched higher as investors turned their attention to the quickly approaching Fed announcement but the bigger moves were seen in Europe. The U.K. Gilt curve was leading a widespread rise across the region with the 2-year yield up 6.8 bps and the 10-year note up 5.4 bps. The spike occurred after freshly released data showed a larger-than-expected gain in employment in January that helped push the unemployment rate back to 4.3%, matching the lowest level since 1975. Adding to the effect was a stronger-than-expected gain in weekly earnings. The Dollar is broadly softer despite speculation the Fed’s Dot Plot may reflect a hawkish refresh. The British Pound gained against the greenback after the strong labor data. The Canadian Loonie (and Mexican Peso) jumped on a report that the White House was no longer seeking as part of the ongoing NAFTA negotiations a requirement for cars imported from our neighbors to be constructed with at least 50% U.S. materials.
ICYMI – March 2018 Bloomberg Survey of Economists: The March 2018 Bloomberg Survey of Economists shows increased expectations for everything from GDP growth to job growth to interest rates. The theme for economists’ surveys was declining projections for the better part of five years, but the opposite has been the case over the past year. Click here for a summary of the March projections and changes from the previous survey.