All eyes are on the Fed today as the FOMC gathers to make its rate decision. Futures markets point toward strong likelihood of another 75-basis point hike.
All Eyes on Fed With Today’s Decision Hours Away
Bond Yields Pull Back Slightly from Multi-Year Highs
Russia in Focus Again as Putin Announces Partial Mobilization
Shawn Cruz, Head Trading Strategist, TD Ameritrade
(Wednesday Market Open) The market often waits until a bearish Federal Open Market Committee (FOMC) interest rate decision to take a spill. This time around, investors seemed eager to get a head start, triggering a broad market selloff Tuesday ahead of this afternoon’s announcement.
The Fed is widely expected to push through another 75-basis-point increase in the fed funds rate, which would put the range between 3.0% and 3.25%. That’s the highest in 15 years. There’s an 82% chance of a 75-basis point hike, according to the CME FedWatch Tool, but some investors think the Federal Reserve could be even more hawkish after last month’s surprisingly hot inflation report.
That still leaves an 18% chance of a 100-basis-point hike, according to FedWatch. Interestingly, that’s down from a 31% chance just about a week ago. Investors are really zeroing in on a 75-basis-point hike, but watch out, for what the Fed may decide to share regarding its balance sheet reduction. The recent rise in Treasury yields could suggest the Fed may get more aggressive on that aspect of tightening.
Beyond the Fed’s rate decision, the FOMC meeting’s conclusion also means investors will get a fresh batch of projections showing where the Fed expects rates, gross domestic product, inflation, and unemployment to head in coming months and years (see below).
Treasury yields had steadily climbed ahead of the meeting, part of the reason the stock market is under pressure. This morning, we saw the 10-year Treasury yield (TNX) ease a bit to 3.52%, which could reflect investors embracing defensive assets after news that Russia would partially mobilize troops for its Ukraine campaign. That was after it briefly edged above 3.6% yesterday, a level last seen in early 2011. Defense contractor stocks are also higher in pre-market amid the Russian saber-rattling.
Investors will also be on their toes today waiting to hear what Fed Chairman Jerome Powell says in his post-meeting press conference, which we’ll cover in detail later this afternoon. Last month at the Jackson Hole conference, his bearish remarks about possible rate hike impacts on the economy punched holes in what had been a spirited summer rally. Major indices are down sharply since then.
Meanwhile, more “defensive” parts of the market like the dollar continue to show strength. It’s not likely that Powell would change his tune too much today, especially considering the stubborn inflation report earlier this month. The dollar is up again this morning, possibly on the Russia news, and dollar strength has been a headwind for the market all year.
One thing to consider as the Fed wraps up its meeting: All but once so far in 2022, the market has rallied after FOMC decisions. The only exception was the first meeting of the year. The main focus this time will likely be on the dot plot, with rate projections for coming years and possibly some insight into what the long-run steady state of rates the Fed will land at. That will probably be the ultimate decider of what direction the market goes heading out of the meeting. We’re sitting near 3,900 on the S&P 500 (SPX), and that’s the pivot point. The question is whether we head toward resistance at 4,000 or support at 3,800.
The Fed isn’t the only central bank we’re awaiting rate news from this week. The European Central Bank (ECB) is expected to decide on Thursday whether to raise their key rate to combat inflation. The ECB is scheduled to make its move just 14 hours after the Fed decision.
Consider keeping an eye on big banks today as several CEOs are scheduled to testify to Congress on topics including the state of the economy, according to Reuters. Some of the banks participating include JP Morgan Chase (JPM), Bank of America (BAC), and Citigroup (C).
A few stocks were making moves in the premarket.
General Mills (GIS) shares got a slight boost after beating consensus earnings estimates.
Stitch Fix (SFIX) was down 5% after missing earnings estimates.
Micron (MU) slid more than 2% after a downgrade.
Tuesday was a day that “went to 11,” so to speak. There was an 11-year high in the 10-year Treasury yield and also an 11-year low for shares of Ford (F).
Ford shares simply got run over on Tuesday, falling by more than 12% late in the session after the company’s announcement earlier this week about facing an extra $1 billion in costs. Ford continues to be dogged by inflation and supply chain issues. And on Tuesday, F’s bad week appeared to spill over into shares of General Motors (GM), which also fell sharply.
The GM decline may have been a bit of a surprise to some, considering it came on the heels of news that it would supply up to 175,000 electric cars to Hertz Global (HTZ). The deal follows HTZ’s deals with other electric car companies, which could mean increased demand for GM cars like the Bolt. Despite that, GM shares fell yesterday in what might have been sympathy with rival F.
Gap (GPS) was another laggard yesterday after The Wall Street Journal reported the retailer planned to lay off 500 employees. The WSJ reported that GPS told employees that operating costs were increasing at a faster rate than sales.
It wasn’t all pain and suffering Tuesday. In fact, one of the biggest mega-caps, Apple (AAPL), stayed green much of the day, rising nearly 2% during the session. That said, AAPL is down nearly 10% from the peak of its summer rally about a month ago, which isn’t much better than S&P 500 Index (SPX)’s performance. The strength in AAPL late Tuesday might have helped pull back the major indices from their worst levels of the day.
Also, Change Healthcare (CHNG) rallied more than 6% on Tuesday after a federal judge denied a request from the U.S. Justice Department to block the merger between Change and United Healthcare (UNH).
Still, things generally weren’t pretty yesterday, with the SPX down more than 1% by the close and the Russell 2000 (RUT) taking the worst hit, down about 1.4%. The Nasdaq ($COMP) and the Dow Jones Industrial Average ($DJI) both lost significant ground as well, though most indices finished well above their daily lows.
Normally you don’t see this sort of sharp market action the day before an FOMC meeting. That means it might be dangerous to go into today expecting calm trading waters. However, the most likely scenario —if precedent holds—is that volatility eases a bit, at least until after the Fed decision and Powell’s press conference.
CHART OF THE DAY: : The Cboe Market Volatility Index (VIX—candlesticks) has recently traded between the 28 and 24 levels. These levels could be key signals for traders after the Fed’s interest rate decision. If the VIX spikes above 28, stocks will likely fall, but if the VIX tumbles towards the 24 level, stocks are likely to rise.Data Sources: Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
PEAK FED: At the start of 2022, the Fed’s dot-plot showed the so-called “terminal” Fed funds target rate–or the peak the Fed projected rates would eventually reach during this cycle—at between 2.3% and 2.5%. That ended up being just a bit outside, considering the Fed has already hiked rates to between 2.25% and 2.5% and analysts expect another 75-basis-point hike today. Does that mean the terminal rates, which the Fed now sees between 3.6% and 4.1% next year (or approximately 3.8%), needs to go even higher? Maybe not. Analysts see a terminal rate near 4%, according to Trading Economics, which puts terminal rates close to the Fed’s last projection. Whether the Fed raises its terminal rate again is one key element of today’s dot-plot. Other questions include by how much, and whether that’s as high as this elevator goes.
“UP” BUTTON AGAIN ON PRICES? Speaking of elevators, inflation has been on an ear-popping ride this year, too, and once again, the Fed’s earlier projections weren’t too close to reality. At the end of 2022, the Fed’s median prediction for 2022 Personal Consumption Expenditure (PCE) inflation was 2.7%, and the Fed expected core PCE to decline to just above 2% in 2023. How times have changed. Core PCE inflation, which strips out volatile food and energy prices, reached 4.6% in July. And in its last long-term projection, the Fed’s median projection was for core PCE of 4.3% in 2022, dropping to a more comfortable but still relatively high 2.7% in 2023. Does the Fed stick with those numbers today? Another nudge higher would probably hurt market confidence, and judging by yesterday’s Wall Street stumble, investors might be getting worried. As for analysts, they generally see core PCE starting to peak, and perhaps falling below 4% by early next year. If the Fed backs that up today, it could come as a relief.
TRACKING FED ON JOBS: Another key number to watch in today’s dot-plot is unemployment, which is near multi-decade lows below 4% despite the hawkish Fed. Unemployment ticked up slightly in August, but some analysts are concerned that as the Fed tightens the screws much more, joblessness could tick up. Back in December, the Fed’s median unemployment projection was 3.5% in 2022, the same for 2023, and more of the same in 2024. But that was before this recent acceleration in rates. By June, the Fed’s median unemployment projection had climbed a bit to 3.7% this year, 3.9% next year, and 4.1% in 2024, with all of those estimates up significantly from March projections. Those aren’t too bad, historically, and not the kind you typically see associated with recessions. So where will the Fed land today on unemployment? We’ll find out soon, but keep in mind that analysts expect unemployment next year to stay near the current 3.7% level, according to Trading Economics.
Sep 21: Existing home sales, FOMC interest rate decision and Federal Reserve Chairman Powell’s press conference followed by earnings from General Mills (GIS), Lennar (LEN), H.B. Fuller (FUL), and KB Home (KBH)
Sep 22: Earnings from Costco (COST), Accenture (ACN), FedEx (FDX), FactSet Research (FDS), and Darden Restaurants (DRI)
Sep 27: Durable goods orders, CB consumer confidence, New home sales and earnings from Cintas (CTAS), Jabil Circuit (JBL), BlackBerry (BB), Cal-Maine Foods (CALM), and Cracker Barrel (CBRL)
Sep 28: Pending home sales and earnings from Paychex (PAYX)
Sep 29: Gross Domestic Product (GDP) and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)
Sep 30: Personal Spending, Chicago PMI, Michigan Consumer Sentiment
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