Good morning contrarians! It is Wednesday, March 22. Fed Day.
Stocks rallied yesterday on hopes the banking crisis is over and done with. Small caps were the biggest gainers, with the Russell 2000 adding almost 2% on the day.
State of Play
As of 0630, all is pretty quiet:
Stock futures are mixed, with the S&P 500 and Nasdaq roughly unchanged but Russell pointing to gains of 0.8%;
Bonds aren’t doing much. The 2-year yield is down 2 basis points to 4.16%. The 10-year is unchanged at 3.59%;
Commodities aren’t doing anything. Copper and crude oil are within 1% of yesterday’s close.
Fed
The Federal Open Market Committee concludes its two-day meeting today to decide on interest rate policy at 1400. Expectations are for a 25bps increase to bring the key rate to 5%. That’s the economist estimate. Futures traders are pricing in an 88% chance of 25bps.
A lot will also depend on the policy statement and Jerome Powell’s press conference that kicks off at 1430. Our most recent podcast guest — a former New York Fed employee — had some interesting thoughts on all this that you should really listen to if you haven’t already.
Earnings
We do have some of these as well. Petco Health and Wellness (WOOF 0.00%↑), Olli's Bargain Outlet (OLLI 0.00%↑), and Winnebago Industries (WGO 0.00%↑) report before the open at 0930. After the close at 1600 we'll get Chewy (CHWY 0.00%↑) and KB Home (KBH 0.00%↑), among others.
The Bottom Line
Friendly reminder that nobody knows exactly what the Fed will do and say. And those who do know are busy trading off that knowledge to share it with any of us. Futures are pointing to a 25bps hike but that’s just what futures traders are doing. They don’t necessarily have any more knowledge than the rest of us (and often have a lot less).
Powell has quite the tightrope to walk here. On the one hand assure the general public he still cares about inflation and price stability, while on the other demonstrating that he will provide liquidity to shore up the banking system should that be needed. The Fed can argue, perhaps even with reason, that these two issues are separate. But how will that translate to the policy the Fed sets today?
The Set Up
It looks like +25bps is priced in, therefore:
If the Fed raises 25bps the reaction may be muted. There could be some disappointment depending on what’s in the policy statement.
If the Fed does pause hikes — or much less, cuts rates — then one can expect a massive rally across the board: equities, fixed income, and gold.
There are many other variables, including what — if anything — the policy statement says about QT, whether new liquidity provisions are announced, or any update is provided on the BTFP.
Powell’s presser could introduce many other factors to the mix. You figure he will have an answer prepared for what they’re going to do at the next meeting in May. In all likelihood he’ll say something about data dependency, but if he makes noise of sticking to interest rate hikes due to price stability, inflation, blah blah blah, then it would certainly also lead to selling.
Enter Powell