Good morning contrarians!
Stock futures are up a bit after indexes notched modest gains yesterday. The Nasdaq and Dow Industrials added 0.2% as the S&P 500 gained about 0.5%.
As of 0620, S&P and Dow futures are up about 0.4%, with the Nasdaq up a little less. Among individual stocks, AMD (AMD) and Starbucks (SBUX) are two of the biggest gainers among S&P names, both up about 6% in the pre-market. Losers include Akamai (AKAM), down 14%, and Match Group (MTCH), down about 7%.
Commodities are gaining, with WTI crude oil up about 3.5% to trade around $106/barrel.
Bonds are flat with the 2-year yield up just 2 basis points to 2.79% and the 10-year holding steady at 2.96%. Cryptos are up a bit with bitcoin up 1% to trade close to $39,000.
Fed Day
The Federal Open Market Committee, or FOMC, announces its interest rate decision at 1400. The consensus calls for the Fed to raise rates by 0.5%, the first time it has raised by that much since 2000. Anything else will be a major surprise. It doesn’t sound like markets would be fully prepared for a 0.75% hike. The Fed has too much to lose by raising just 0.25%.
As you can see from the above chart, interest rates have a long way to go before they get back to anything resembling historical norms. Unlike the period 2008 to 2015, inflation is now a serious issue for the U.S. economy. So the Fed is rightfully signaling a move to aggressively tighten rates. Just how aggressively, and just how quickly, will form the basis for most of today’s speculation.
Economic Data
There are other economic data releases that precede the Fed party today. In chronological order:
ADP Nonfarm Payrolls (395,000 anticipated; 455,000 previous), at 0815
Trade Balance for March (-$107 billion anticipated; $89.2 billion previous) at 0830
Markit Composite PMIs for April ((58.5 anticipated; 58.3 previous) at 1000
Crude Oil Inventories (-0.829 million anticipated; 0.69 previous) at 1030
Frankly, it’s hard to see how any of these will move markets. It’s all about the Fed today.
Earnings
Earnings season has now peaked and is starting to slow. But we still have a few big companies left to report. Today’s include Yum! Brands (YUM), CVS Health (CVS), Corteva (CTVA), eBay (EBAY), Etsy (ETSY), Realty Income (O), Marriott International (MAR), Rent-A-Center (RCII), and Sturm Ruger (RGR).
The Bottom Line©
It’s all about the Fed. Assuming a 50 basis point rate hike is what happens, the market reaction will depend on the language of the statement (and how it differs from the last meeting’s) and comments by Jerome Powell at his press conference.
Markets are forward-looking mechanisms and the direction of risk assets today depends on exactly what Powell and the Fed say about future rate hikes. Another 50bps hike is all but priced in for next month. Then things get uncertain.
What exactly is the Fed’s longer term plan for warding off inflation? When might they take their foot off the pedal? What kind of data will they be looking for in making this assessment? One can expect Powell to get a bunch of questions to this end today. Whether he answers with any kind of clarity is another question (in fairness, he may not know the answers himself).
For investors the question is threefold: 1) how soon will these rate hikes eat into economic growth, assuming they aren’t already? 2) how quickly will inflation ebb as a result of these same rate hikes? And 3) can the Fed walk the tightrope between these two forces?
(And if the answer to this third question is “no,” then which side will the Fed err on, and what will be the impact on the various asset classes, but that’s another topic for another day).
Fed Interest Rate Decision: Daily Contrarian, May 4