The Market Today
Just How Hawkish Might the Fed Be on Wednesday?
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
FOMC Meeting – A Hike and a Change to the Forward Outlook (But How Much?): This week’s economic calendar will be dominated by Wednesday’s FOMC Meeting. While there is fairly strong consensus about the results – investors/analysts/economists expect the Fed to hike 25 bps and increase their forward rate projections – there is uncertainty about the degree to which the Fed will raise those forward projections. As it relates to the expected rate hike, Fed Funds Futures contracts are now pricing in a 100% chance of a rate hike. In fact, futures are showing an 82% chance of a 25 bps hike and an 18% chance of a 50 bps hike. A 50 bps hike seems highly unlikely in this environment. First, this is new Chair Powell’s first meeting and he will want to give an impression of continuity with the previous Fed regime. Second, the markets have already shown how finicky they can be when the Fed might have to be more hawkish than expected (see early-February equity market reaction). As such, another 25 bps hike appears to be the logical expectation.
As for the area of uncertainty, the degree to which Fed officials raise their forward projections, the December Dot Plot showed a median projection of three hikes in 2018, just over two hikes in 2019, two additional hikes in 2020, and a longer-run neutral rate of just 2.75%. We will specifically be watching Wednesday for changes to the 2018 and 2019 projections, with a secondary interest in the longer-run neutral rate projection. Given the lack of compulsion by the inflation data, it appears unlikely that they will materially raise their forward projections. One additional hike in 2018 and one more than originally projected by the end of 2020 would be reasonable and should not upend the markets. Anything more aggressive than that would run the risk of doing so.
As for the remainder of the week, Wednesday will bring the February Existing Home Sales report (exp. +0.4% MoM) and Friday will bring the February New Home Sales report (exp. +5.2% MoM). After a run of weak housing reports, this data will be interesting – but unlikely to take the focus off the Fed decision.
Overnight – Treasury Yields Rose Despite Equity Futures Taking it on the Chin: Global equities have backpedaled to start the week as concerns around global trade continue to fester in front of a presumed 25 bps hike from the Fed on Wednesday. U.S. equity futures are sharply lower after a negative start in Asia and a more-than-0.6% drop for the Stoxx Europe 600. Contracts on the Dow were down more than 100 points, options on the S&P 500 were off more than 0.6%, but the tech-heavy Nasdaq was leading the weakness with a more than 1.4% drop. However, the daily weakness hasn’t translated into a broader bid for safety. Key haven assets such as gold, the Yen, and U.S. government bonds are all weaker. As Treasury prices weakened, the 2-year yield rose 1.7 bps to a new cycle high of 2.31% while the 10-year yield had moved 2.4 bps higher to 2.87%. Leading global yields higher was the U.K. yield curve which jumped on news that the country had reached a broad transition agreement with the EU. The British Pound was also Monday’s top performing currency.
ICYMI – March 16, 2018 Weekly Market Recap: Despite a couple of stellar reports on the sentiment of U.S. businesses and consumers, U.S. equities dropped more than 1% and the Treasury curve flattened last week as the long end moved lower. Small business confidence unexpectedly hit a new cycle-high in February and its third strongest level in the series’ 45 year history. Similarly, consumers struck a positive tone in their latest survey responses and drove the University of Michigan’s overall sentiment index to its highest level since 2004. Also on the positive side was a new record high for job openings in January’s JOLTS report and a big bounce in manufacturing and industrial production in February. Still, those data points weren’t enough to support stock prices and lift longer yields amidst other news. Retail sales missed estimates again, CPI inflation lacked another hot surprise, the housing data remained suspect, and there was more turnover in the Trump Administration. Click here to view the full recap.