TUESDAY:
The FOMC meeting dominates the action again as investors wait to see what the Fed is planning for interest rates. The Fed Funds Futures contract tells us 3 more hikes for sure and a fourth 25BP hike has just a modest probability attached to it. Still a long way out and accuracy grows with proximity, but it gives us an idea that the Fed is going to stick to its hiking for the next four months. That helps put the Fed's statement into perspective as opposed to simply relying on gut reaction to what it says or does not say.
Stocks have shown a tendency to rise heading into the FOMC meetings, though last meeting there was some early weakness before stocks started to bounce ahead of the release. With SP500 facing key resistance at the Monday close, making headway into the Fed meeting will be tougher sledding. Maybe it will surprise us and jump right on through that level. In any event, the action after the meeting is the real story, starting after the knee-jerk reaction concludes.
Much depends upon what the Fed does with its statement and the 'measured' language. Speculation runs rampant about the change; we think after the last statement it is ready to remove 'measured' to give it more flexibility similar to it getting the Fed Funds rate higher to give it more maneuvering room to cut rates if needed in the future. That does not mean it is going to hike faster (though it could); it could also mean it could stop hiking because removing 'accommodation' at a 'measured pace' is saying the Fed is going to continue raising rates.
We are not saying it won't raise rates Tuesday; it will. What we are saying is that 'measured' has to be removed before the Fed can say it has stopped. It had to come out at some point, and this Fed likes to do things a step at a time: advertise the policy, enact the policy, advertise a change, talk about the change, then enact the change. The Fed is in the step where it has already advertised changing one step, and after this step it will have to advertise some more before it takes the next step, e.g. when it decides to stop raising rates. This process takes time, and unless there is a real emergency, the rate hikes are not going to stop in the next two FOMC meetings, an likely the next three (including the one Tuesday).
The Fed meeting will require patience to let things take their course, let the announcement come, and then see the reaction. There is some irrational hope the Fed will hike and say it is done. Maybe that will happen. Likely it won't, and that will crush some of that hope and it could be enough to stall this 2-day rebound attempt. The indices are still in downtrends and still have to prove up this move. Wednesday will tell more of the tale as that is the first day the market can show a follow through and that lets the Fed decision percolate through the market. Unless the Fed softens its stance some, it is hard to see the market taking the news as a big positive as the Fed and oil are what is keeping the lid on the market right now. Until the market gets clear sense the Fed is winding down, it remains on edge. |
