The Market Today
FOMC Begins Two-Day Meeting with Focus on Dots and Inflation Target
by Craig Dismuke, Dudley Carter
FOMC Meeting Begins: The FOMC’s two-day meeting begins today with the policy decision scheduled for tomorrow afternoon. There is no sentiment that the Fed will hike. Instead, investors will be focused on two things, 1) the dot plot and 2) any progress on discussions about the Fed’s inflation target.
The Dots: As for the dot plot, economists expect Fed officials to cut their 2019 projections to show either no hikes or, perhaps, just one. Back in September, the Fed’s Summary of Economic Projections (SEP) showed a median YE19 forecast calling for three hikes. This projection fell to two hikes in the December SEP. If officials do lower their 2019 dots, their 2020 and 2021 dots would necessarily be lowered as well unless they intend to signal to the markets that “patience” will be followed by significant tightening (see Chart of the Day). Currently, the dots project a Fed Funds median rate of 3.125% for year-end 2020.
A New Inflation Target?: On the inflation-target discussions, the idea which seems to have gained the most traction is using average inflation rather than a singular target. Under the average-inflation-target scheme, the Fed would attempt to average a 2% rate of inflation over some period of time. As a result, if they experience a run of weaker-than-target inflation, they would be expected to run above-target inflation for some period of time. Looking at today’s example, the below-target inflation reports seen lately would imply easier monetary policy for longer in order to bring – not just the one-month rate – but the average of the inflation reports up to target. One of the key questions yet to be answered is, how long of a time period would the averaging cover. Any progress on these talks will be important to the markets.
Business Investment and Factory Orders: January’s final revision for monthly durable goods orders is scheduled for 9:00 a.m. CT. Core capital goods orders, an indicator for future business investment in equipment, rose a solid 0.8% MoM in the advance report, while core shipments increased the same. Both were better-than-expected and point to business investment holding up better than anticipated coming into 1Q19. Also at 9:00 a.m., January’s factory orders report is expected to show a 0.3% MoM gain.
Yesterday – Stocks Climbed While Treasury Yields Remain Stuck: The three major U.S. equity averages opened higher Monday and gradually recovered from a sharp mid-morning drop to post a second day of gains. The Dow and Nasdaq both rose 0.3% while the S&P added a marginally better 0.4%; the S&P 500 and Nasdaq ended at their best levels since October. Earlier in the day, indices in China and Europe reached their best marks since May and October, respectively. Energy companies were the top performers within the S&P 500 as U.S. WTI oil neared $59 per barrel, its highest level since November. Leaders from OPEC decided over the weekend to stick with the ongoing production cuts that have helped lift WTI by 30% in 2019. The communication services sector slid to an 11th place finish as shares of Facebook tumbled more than 3%. The social media giant saw its shares fall out of favor in response to a couple of negative analyst reports. Despite the multi-months highs for the stock market, Treasury investors remained unstirred by the apparent optimism. While most of the curve closed up between 1.5 bps and 2 bps Monday, most maturities remained near the bottom of their recent ranges with intermediate (5-year at 2.41%) and longer yields (10-year at 2.60%) hovered around their lowest levels since early 2018.
Overnight Trading – Brexit Developments Driving Euro Stocks Higher: Markets welcomed reports overnight that Prime Minister May might request a longer-than-expected delay on the Brexit timing, a delay of nine to twelve months according to U.K. news. That report was, however, challenged by people familiar with the ongoing discussions. As for European officials, reports emerged that they may not finalize a Brexit extension at this week’s Global Solutions summit. Rather, they may offer a conditional proposal allowing Prime Minister May one final chance to get her Brexit plan through Parliament before March 29. This pressure could be just what is needed to persuade Parliament to pass May’s softer exit process. Encouragingly, German Chancellor Merkel said she “will fight to the final hour … for an orderly Brexit.” Euro stocks are up 0.9% overnight while the U.K.’s FTSE 100 is up 0.6%. Eurozone yields are up also with the German 10-year yield back above 0.10%, up 2.8 basis points overnight.
Home Builder Confidence Unchanged in March: Home builder confidence was unchanged in March, disappointing expectations for a one-point improvement. The NAHB’s Housing Market Index held at 62, a five-month high but down 8 points from a year ago and below levels seen throughout most of 2017 and 2018. The details were mixed with improved sales expectations offset by a cooling in traffic of prospective buyers. The mixed results followed a noisy new home sales report last week showing slower-than-expected January activity that was salvaged somewhat by 63k in positive revisions to the prior three months. Mortgage rates have declined around 0.50% since November, helping ease affordability pressures. The NAHB’s Chairman commented, “Builders report the market is stabilizing following the slowdown at the end of 2018, and they anticipate a solid spring home buying season.”