The Market Today
FOMC Meeting Kicks Off; Stock-Strength Becoming Less Resilient
by Craig Dismuke, Dudley Carter
FOMC Expectations: There are no economic reports scheduled for today. The FOMC begins its two-day meeting today with its policy announcement slated for tomorrow. The Committee is likely to hike rates another 25 basis points bringing the Fed Funds target range to 1.50-1.75%. New Fed Chair Powell is likely to try to keep some continuity in his messaging with previous Chair Yellen, reducing the risk that he advocates for a faster “gradual pace.” His post-FOMC press conference communication style is an unknown quantity. Investors will be wise to not become overly reactionary to his comments, giving them a chance to be clarified in later speeches (recall that Powell’s first testimony to the Senate Banking Committee seemed overtly hawkish but was nuanced in his subsequent testimony before the House Financial Services Committee to sound less hawkish). The real question will be the movement of the Dot Plot. Our best estimate is that there will be quite a bit of movement in the dots, mostly higher, and the median future rate projections will inch higher across the forecast.
Yesterday – Stocks Dropped the Most Since February 8: Trouble in the tech space led a sharp negativity towards global equities more broadly Monday and left certain major equity indexes in precarious technical positions. A soft start during Asian trading led to a further stumble in Europe that had pressured U.S. futures lower in pre-market trading. The losses intensified at the U.S. open and European equities ended near their daily lows. The Stoxx Europe 600 fell 1.1% and its 50-day moving average dropped below the 200-day, a bearish technical indicator traders refer to as a “death cross”. The tech sector never turned it around during U.S. trading and the Nasdaq led losses with a 1.8% tumble. The Dow and S&P 500 fell 1.4%, and both closed below their 50-day moving averages. Facebook was the S&P’s biggest detractor, down nearly 7% in its largest daily decline in almost four years and eighth biggest since going public in 2012. The social media giant drew major news coverage and the attention of key world leaders after reports a third party accumulated personal user data for political purposes during the U.S. presidential election. Stocks were also faced with a presumed Fed hike on Wednesday and speculation surrounding what the refreshed Dot Plot will look like. The yield curve reflected those Fed concerns, with the 2-year yield adding 1.7 bps to 2.31% and the 10-year yield up 1.1 bps to 2.86%, more impressive considering the deterioration in the equity space.
Overnight – Stocks Show Signs of Stability and Yields Inch Higher as the Fed Starts Two-Day Meeting: Equity investors appear more even-keeled Tuesday leading to mixed results across Asia and modest gains in Europe. With global markets in check, U.S. futures stabilized and are signaling a quiet U.S. open. As Fed officials gather in Washington to kick off its two day meeting expected to result in a rate hike and a potentially steeper forward path, U.S. Treasury yields ticked higher. The implied path in fed funds futures steepened and the 2-year yield added 1.5 bps to 2.32%. The 10-year yield rose 2.2 bps to 2.88%. The Dollar was firmer against the Euro after a popular sentiment index tracking economic expectations for the Eurozone slipped to its lowest level since October 2016. The Dollar gained against the British Pound following weaker than expected U.K. inflation data.
Reports Indicated the ECB is Discussing Rate Normalization Process: The Euro got a lift around 7 a.m. U.S. central time Monday after sources told Reuters that monetary policymakers at the ECB have begun discussing when and how the central bank will raise rates when the time comes. From the Reuters report, “Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.” The current policy of buying 30B Euros worth of bonds each month expires at the end of September 2018 and the consensus expectation is for a ratable reduction by the end of the year. The next step would be changes to the key policy interest rates. The ECB faces a single mandate of stable prices, which it has defined as inflation levels below, but close to, 2%. Just last week, February’s inflation metric slowed from 1.3% YoY to 1.1%, short of the 1.2% rate expected.