Rate Hike Likely Today, Fed's Future Policy In Spotlight

A 25 basis-point rate hike today seems baked in, but what sort of picture will the Fed paint about future policy? Stock futures pointed toward a slightly higher open as the Fed gathered for the second day of its meeting and investors sought more clarity.

The big question is what the Fed’s new targets will be, and how clearly the Fed will spell that out in its forecasts. Those “dot plot” forecasts show the path each Fed member expects rates to take. Odds for a hike today stand at 95%, CME futures indicate, and the Fed has previously said it plans three rate increases this year. But the futures market also puts 25% odds on a possible fourth rate hike by December.

What the Fed says today about its future expectations and which data it plans to watch could paint a clearer picture about that mysterious fourth hike, and then the market would have to adjust. In fact, it may already be doing so. Some of the selling yesterday as the S&P 500 Index (SPX) broke its three-day win streak might have reflected nervousness about the possibility of a more aggressive Fed.

Once again on Tuesday, steep energy sector losses helped weigh on the broader market, with energy stocks down more than 1% as oil fell to new three-and-a-half-month lows. It was the seventh-straight session of oil market losses, as OPEC's monthly report showed increased production for Saudi Arabia in February. However, oil bounced back a bit early Wednesday.

But energy wasn’t the only sector under pressure Tuesday, as industrials and materials also had rough days. Both sectors have been under-performing the broader market over the past month, though each has outpaced the S&P 500 Index (SPX) since a year ago. It’s possible that concerns about the pace of the new administration’s infrastructure and tax plans, which still remain under wraps for the most part, could be dogging these sectors a bit. The chance of a more aggressive interest rate scenario also could be a bearish factor.

And VIX, the most widely-watched measure of volatility, took a big hop Tuesday ahead of the Fed meeting, rising 8% by the end of the session to back above 12. It’s not uncommon for VIX to pop up a bit ahead of a Fed meeting, but it often goes back down afterward. We’ll see if that’s the case later today.

The dollar fell against the euro and yen early Wednesday, but losses were light. It might be prudent to keep an eye on the dollar if the Fed sounds more aggressive in its post-meeting remarks. Further rises in the dollar would potentially be unpleasant news for many U.S. multi-national companies, as it tends to depress foreign buying interest in U.S. products. Info tech, industrials, and health care are among the sectors to watch for possible dollar ramifications.

As Expected

No surprises this morning from two big data releases, as both retail sales and the consumer price index (CPI) for February met analysts’ consensus expectations. The CPI and retail sales both rose 0.1%, well below the increases they posted in January. With the auto sector stripped out, core retail sales rose 0.2%, which represents decent progress. Additionally, the government raised January retail sales to 0.6% from the prior 0.4%. That’s pretty solid growth, and could be reflected in analysts’ estimates for Q1 gross domestic product (GDP) growth. As of now many analysts expect GDP to come in at around 2%, though the Atlanta Fed has growth at just 1.2%. The Atlanta Fed is due to update that estimate today.

Construction Ahead

Tomorrow morning brings February housing starts and building permits data, which often serve as helpful proxies not only of how the consumer is doing, but also of construction industry health. Last week’s Non-farm payrolls report showed a big gain in February construction jobs, and some of that could have been from more robust new housing demand. Housing starts have generally risen since last September, but fell 2.6% in January to a seasonally-adjusted annual rate of 1.246 million. Building permits jumped 4.6% in January to a seasonally-adjusted annual rate of 1.285 million. Consensus among analysts for February is for a slight bump from January in starts but a dip from January in permits, according to Briefing.com. One thing to ponder is whether the unseasonable warmth across much of the country in February might have pulled some construction activity forward, perhaps meaning less action later this spring. We shall see.

A Dollar Gas

In an old rock n’ roll song, a driver requests “a dollar gas” from a pump jockey back when a dollar could conceivably have filled almost half the tank of a lumbering DeSoto or Hudson. It’s been a long time since prices like that, but local news media reported this week that a price war in Houston took gasoline at one station down as low as 78 cents a gallon. Customers reportedly waited in line for as long as 20 minutes to take advantage. Needless to say, 78-cent gas isn’t likely coming to a station near the rest of us, but there’s no real sign of the typical spring rally in prices, either.