Main Event: Focus Shifts From Nvidia to Washington for FOMC Meeting

Nvidia CEO Jensen Huang announced a new generation of artificial intelligence chip Monday ahead of the Fed's two-day meeting that's widely expected to conclude with no change, though three rate cuts still possible in 2024.

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Key Takeaways

  • Housing starts and building permits beat analyst estimates

  • Dot plot rate projection revision key issue to watch

  • Three cuts still possible in 2024 even with late start 

(Tuesday market open) Wall Street picked itself up off the mat Monday following a three-day slump but the rebound looks to be short-lived as investors brace for the week’s main event: the Federal Open Market Committee (FOMC) meeting.

Futures based on the S&P 500® index (SPX) were down about 0.4% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) dropped 0.6%, both tracking for the fourth down day in the past five. Futures based on the Dow Jones Industrial Average® ($DJI) eased 0.2%.

Technology led the way up Monday and is leading the way down so far Tuesday. Shares of semiconductor leader Nvidia (NVDA) fell over 1% in premarket trading, giving up gains late Monday after CEO Jensen Huang, speaking at his company’s GTC conference in San Jose, California, announced a new generation of artificial intelligence chips.

Otherwise, market focus likely will be on the other side of the country, in Washington, D.C., where the FOMC begins a two-day meeting today that’s widely expected to conclude with no change in the Fed’s benchmark funds rate. There’s still potential for surprises, however. Fed Chair Jerome Powell’s post-FOMC press conference Wednesday afternoon will be closely studied, and the FOMC will also update its economic forecast, including its so-called dot plot of members rate expectations for the next few years.

In the wake of higher-than-expected inflation readings the first two months of 2024, Powell may be inclined to emphasize the message that the central bank will take a cautious approach to the prospect of any interest rate cuts.

“We are bracing for a potentially ‘hawkish’ FOMC meeting,” said Kathy Jones, Schwab’s chief fixed income strategist. “We still expect three rate cuts this year, despite the recent surge in Treasury yields and modest fed funds market repricing.”

The rate decision arrives at 2 p.m. ET Wednesday, followed by Powell’s press conference.

The Fed isn’t the only central bank making headlines this week. Earlier Tuesday, the Bank of Japan raised its rates for the first time since 2007, ending its negative rates policy aimed at fighting deflation.

Morning rush

  • The10-year U.S. Treasury yield (TNX) was down over three basis points at 4.304%.
  • The U.S. Dollar Index ($DXY) was up 0.3% at 103.896.
  • The CBOE Volatility Index (VIX) was up 0.20 at 14.53.
  • WTI Crude Oil (/CL) was down about $0.14 at $82.02.
  • Bitcoin (/BTC) was down over 7% at $63,549.

What to watch

In economic news, the Census Bureau reported Housing Starts rose at an annual rate of 1.521 million in February, up from 1.374 million in January and higher than analysts’ estimates. Starts were expected to come in closer to 1.435 million, according to a consensus figure from Briefing.com.

The bureau also reported Building Permits, a measure of future activity, at an annual rate of 1.518 million last month, up from 1.489 million in January and also above forecasts. Analysts expected permits around 1.485 million.

The FOMC is expected to issue fresh economic and rate projections for the first time since December. 

The dot plot released in December suggested policymakers expected three quarter-point cuts in 2024. However, inflation perked up in early 2024, which could mean the next set of dots may not be aligned for as many cuts as investors hope.

One key question hovering over this week’s FOMC meeting, Schwab’s Jones said, is whether the Fed will revise its 2024 dot plot rate projection higher. It would take two FOMC members to do so, she said, so “it’s possible. But there’s still more than nine months left in the year, so a later-than-expected start to rate cuts still allows for three cuts in 2024.”

“Inflation has been noisy over the last two months,” she added, and while Consumer Price Index (CPI) and Producer Price Index (PPI) numbers generally surprised to the upside, “the beats were modest.”

  

Stocks in spotlight

Based on premarket trading, semiconductor shares and other tech companies may remain under pressure after the sharp runup earlier this year. Nvidia’s gains after Monday’s announcement, for a new computing platform called Blackwell, turned out to be short-lived. But the stock is still up 79% so far this year and touched a record high earlier this month.

Tuesday’s earnings calendar is relatively light in terms of big names, but the pace picks up Wednesday with major semiconductor company Micron Technology (MU) expected to report results after the market closes.

Micron Technology shares have gained a respectable 10% so far this year, but still lag well-behind the industry’s top performers. By comparison, the Philadelphia Semiconductor Index (SOX) is up 14%.

In addition to Micron Technology, discount retailer Five Below (FIVE), food processor General Mills (GIS), and homebuilder KB Home (KBH) are also expected to report results Wednesday. FedEx (FDX), Nike (NKE), and lululemon athletica (LULU) are expected to report results Thursday.

Healthy shipping numbers usually reflect a strong economy, so FedEx results are typically watched as a global barometer of business growth.  FedEx shares are about flat compared to the end of 2023, which puts the stock around the middle of companies in the Dow Jones Transportation Average ($DJT) in terms of share performance. The transportation average is down 3.2% year to date.

Monday in review:

Stocks rose in early trading and mostly held gains into the closing bell. After roller-coaster action the week before, the S&P 500® index (SPX) and Nasdaq Composite® ($COMP) both snapped three-day losing skids to finish sharply higher. Large caps were in favor while the small-cap Russell 2000® Index (RUT) ended modestly lower on the day.

Eye on the Fed

Early today, futures trading pegged chances at 99% of the FOMC leaving rates unchanged at this week’s meeting, according to the CME FedWatch Tool. The market prices in a 93% chance the funds rate will remain unchanged after the Fed’s May meeting.

Traders have also lowered expectations for a Fed cut in June. Odds for a quarter-point rate cut following the FOMC meeting that month are now about 55%, down from 63% a week ago, based on the FedWatch tool.

CHART OF THE DAY: COPPER POPS.  Copper futures (/HG) rallied sharply over the past week and on Monday touched an 11-month high of $4.164 per pound (yellow arrow) rising about 13% from a February low (red arrow). Recent gains reflect reports Chinese copper smelters agreed to curtail production amid concern over tight supplies and expectations for central bank rate cuts that could spur the global economy. The red metal is sometimes referred to as “Dr. Copper” because some believe its price patterns foreshadow shifts in the global economy. Data source: CME Group. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest


Coming to terms with Fed rates: Much of the market’s recent Fed focus has revolved around when the central bank might make an initial cut in its benchmark funds rate after the historically aggressive rate-hiking cycle of the past two years. Assuming Fed rate cuts are coming, it’s also worth considering how low rates might eventually go. Many believe the longer-run terminal rate where the fed funds rate may drop into an easing cycle would be 2.5% to 3% (about half the current funds target range of 5.25% to 5.5%), according to the Schwab Center for Financial Research. The terminal rate is also referred to as the “neutral rate,” where the Fed sees its policy as neither increasing nor decreasing inflation or growth. But that terminal rate could change. “If it shifts higher, it could cause the market to have a negative reaction,” Schwab analysts said. “However, the reason for a change is more important than a change itself. If it’s adjusted higher due to the realization that the U.S. can have stronger growth without generating more inflation due to increased productivity, it’s a good thing.”

Big company execs dialing up AI talk: Artificial intelligence has become an increasingly popular conversation topic, and not just among gamers and the tech crowd. Over the soon-to-be-completed quarterly earnings season, AI was mentioned by executives at 179 S&P 500 companies during their post-earnings conference calls, according to FactSet. That number was well-above the five-year average of 73 and the second highest for any quarter going back to at least 2014, FactSet said in the report. The second quarter of 2023 holds the record for company AI mentions, at 181. For those 179 companies, the average number of times AI was mentioned during their earnings calls was 13. The company that led the pack in AI mentions probably comes as no surprise: semiconductor leader Nvidia, at 114. The companies on FactSet’s list apparently aren’t just talking a good AI game. S&P 500 companies that cited “AI” during fourth-quarter earnings calls posted a higher average stock price performance (29%) over the past 12 months compared to S&P 500 companies that did not (17%), according to FactSet.

A Streamer Runs Through It: Americans’ shift to streaming TV is turning into a real gusher. Household spending on streaming services in January jumped 14% from the same month in 2023 and surged more than 70% from 2021, according to a Bank of America (BAC) study. And despite accelerating “streamflation” with recent price hikes, the share of households spending more than $101 per month has more than doubled the past three years. The study was based on credit and debit card data. Millennials and Gen Xers in particular are driving these trends, with over 50% of both groups paying for two or more streaming subscriptions. “Thus far, customers have generally been willing to absorb cost increases and even sign up for more services to access the at-home entertainment options they are looking for,” Bank of America said. The increasing ranks of “cord-cutters” saying goodbye to traditional cable or satellite TV has been a boon to companies like Netflix (NFLX), whose shares are up 27% so far this year. Amazon (AMZN), Apple (AAPL), Walt Disney (DIS), and several others are also ramping up streaming offerings.

Calendar

March 19: February Housing Starts and Building Permits.

March 20: FOMC rate decision and projections and expected earnings from Micron (MU) and General Mills (GIS).

March 21: February Existing Home Sales, February Leading Economic Indicators, and expected earnings from FedEx (FDX), Nike (NKE), lululemon (LULU), and Darden Restaurants (DRI).

March 22: No major earnings or data expected.

March 25: February New Home Sales.

March 26: Durable Goods orders

Print

Key Takeaways

  • Housing starts and building permits beat analyst estimates

  • Dot plot rate projection revision key issue to watch

  • Three cuts still possible in 2024 even with late start 

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