Fed Week Starts With A Hike Widely Expected, But Also Amid Hopes For More Clarity

Fed week dawns with high expectations of a rate hike, but a lot of uncertainty about the overall economic situation. Weak inflation and retail sales data last week followed a February jobs report that could hardly have been scripted any better, leaving some investors confused about how the Fed might view these conflicting developments.

The Fed meeting, its first under new Chairman Jerome Powell, begins Tuesday and ends with a decision scheduled for 2 p.m. ET Wednesday. This is a full meeting, with a press conference, statement, and “dot chart,” so investors are likely to finish the day Wednesday with a much better sense of where the Fed stands. However, that doesn’t mean every question will necessarily be answered. A hike this time out looks to be almost a sure thing, as much as anything can be in the economic world. What happens after that remains an open book.

As of Friday, CME Fed funds futures indicated a 94% chance of a rate hike this week, up from 88% a few days earlier. You never want to make predictions, but when the futures market is this certain, it often turns out to be correct. The real question is what the updated “dot chart” might look like when it comes out on Wednesday. The dot chart, you’ll recall, is a diagram of where Fed officials predict rates will be at various points looking out on the calendar over the next few years.

Many investors could likely be watching to see what that chart says about the Fed’s projected path for the remainder of the year, particularly whether a fourth rate hike is likely. The Fed has been projecting three. Fed funds futures point to around a 32% chance of a fourth hike, which isn’t far from where predictions have been for about a week. However, the light retail sales and inflation data last week might have raised some questions about just how far the Fed is willing to go, and the press conference and statement, along with the dot chart, all could provide hints. 

The market might trade a bit quietly earlier in the week, as it often does ahead of a Fed meeting. Its direction after that could hinge on just how hawkish or dovish Powell and company sound Wednesday afternoon. 

The Fed isn’t the only game in town this week. More housing numbers also roll in, and they may take on greater urgency after a disappointing report on housing starts and building permits Friday. Housing starts dropped 7% to a seasonally adjusted annual rate of 1.236 million units in February, the Commerce Department said. Economists had forecast housing starts falling to a pace of 1.283 million units according to Briefing.com. Permits for future home building decreased 5.7% to a rate of 1.298 million units in February.

Those numbers marked a sharp turn-around from big gains in January. Looking ahead to existing home sales, due Tuesday morning, investors might want to see if the trend of tighter supplies and higher prices continues. Sales declined 3.2% month-over-month in January to a seasonally adjusted annual rate of 5.38 million, and there was also a downward revision to December’s data. New home sales for February are due Friday.

If housing continues to slump, it may call into question whether people are feeling the effect of what appears to be a very healthy job market. One thing to consider: Wages generally haven’t risen as much as some economists have expected considering the job growth, so if housing starts to look weak, it could mean people aren’t feeling like their salaries are high enough to make these kind of big purchases. That might be a bit of a stretch, especially if it’s just a couple of reports. Still, it’s something to monitor over coming months, because housing often shines when the economy is strong.

Another data point Friday is durable orders for February. The number fell in January, but that was mostly a function of weak automobile sales. Continued pressure on durable goods could play into estimates for Q1 gross domestic product (GDP). Some economists have been pulling back on previously bullish estimates for Q1 growth.

Some earnings reports also loom as the end of the quarter approaches, with Oracle Corporation ORCL due to report after the bell Monday. Focus might be on results from the company’s cloud services.  In addition, Thursday looks like a particularly busy results day (see below), with (NKE) among the companies reporting.

In other corporate news to consider watching, the Justice Department’s review of the proposed AT&T Inc T/Time Warner Inc TWX merger begins this week. Opening arguments are scheduled, though it’s unclear how long a ruling it might take. The review comes at arguably an auspicious time considering Broadcom Ltd AVGO officially withdrew a $117 billion takeover bid for its rival chip maker QUALCOMM, Inc. QCOM last Wednesday, two days after President Trump issued an order to block the acquisition effort on national security grounds. 

Whatever the ultimate ruling on the T/TWX merger, it’s likely to have far-reaching implications for other merger and acquisition (M&A) deals under discussion now. The telecom sector is trying to respond to a lot of changes taking place, and M&A and consolidation is one way the industry is addressing those changes. So the outcome of this case has implications for some of the Comcast Corporation CMCSA deals out there, and possibly for deals in the healthcare space as well.

Most sectors came under pressure last week, so we’ll see if that persists. Some of the worst performers included materials, financials, industrials, and consumer staples. The info tech sector was relatively unscathed, leading to thoughts that there might be some repositioning going on, particularly with money seemingly flowing out of staples and into info tech.

There was also an apparent uptick last week in people seeking fixed income investments, if the Treasury bond market is any measure of that. Longer-term yields in the interest rate complex edged back slightly, though shorter-term yields climbed. It’s possible this sort of pattern could reflect some investors seeking “safety” in longer-term fixed income products.

FIGURE 1: HANGING IN THERE. After a lot of choppiness earlier this year, both crude oil (candlestick) and the Dollar Index (purple line) seem to have found comfortable and rather tight trading ranges over the last week or two. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Retail Redux

After this week’s disappointing February retail sales report, stocks sank amid concerns that consumers might be retreating. Those fears were exacerbated, perhaps, by the fact that it was the third straight monthly decline in retail sales. But not to fear, some economists say. One thing to consider is that the full effect of tax cuts really hasn’t had an impact. In fact, some taxpayers haven’t seen the impact on their paychecks yet, but could be starting soon, one economist said on CNBC early Friday. That means more money could be coming into pockets over the coming months, freeing up some extra cash to spend. The other thing to consider is that retail sales were very strong heading into the holidays and in the wake of last fall’s hurricanes. A slight downturn after those events isn’t all that surprising, and sales could be poised to revive as spring begins. Stay tuned.

Beyond the Headlines

Speaking of consumers and their potential buying patterns, the University of Michigan’s preliminary March sentiment data exceeded Wall Street analysts’ expectations with a headline figure of 102. That was the highest level since 2004, and up from 97.9 in February. On its face, the data looked pretty constructive, but when you drill into the survey’s responses from consumers, it’s a little less favorable. For one thing, many consumers seem to expect higher prices and higher interest rates, so they’ve decided to spend ahead of that, the survey’s press release said. In addition, income expectations fell slightly. Some of the people surveyed also said they’re concerned about the possible impact of tariffs on the U.S. economy.

Feels Like Earnings Season Again

This week is one of the quieter earnings weeks of the quarter, but that doesn’t mean there’s nothing on the schedule. For instance, Thursday features a diverse set of results from various industries. The lineup that day includes Accenture PNC ACN, Carnival Corp CCL, ConAgra Brands Inc CAG, Darden Restaurants, Inc DRI, Micron Technology, Inc. MU, and Nike Inc NKE, among others. That’s a pretty massive list and would bear watching even in the heart of earnings season. One thing to potentially listen for is executives’ take on possible trade friction between the U.S. and China. The Chinese market is important to some of these companies. For instance, NKE reported over $1.2 billion in sales to Greater China in its last earnings report.

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