Fed to Play 'Kick the Can'? - Ahead of Wall Street

Pre-open sentiment is indicating a modestly lower open for today's session a day after the no-news weak session. We will most likely see a repeat performance today, as investors start factoring in Fed policy uncertainty ahead of next week's FOMC meeting. The strengthening dollar and rising treasury yields are reflective of this Fed uncertainty.

The Fed's meeting next week will take us closer to the end of the crisis-era easy-money policy, bringing the monthly pace of bond purchases down by another $10 billion to $15 billion. This will lead the central bank to end the program altogether at the October meeting.

Except many in the market don't view the last jobs report as a trend reversal in the economic outlook, and expect the Fed to start tweaking the language of its post-meeting statement that will hint at interest rates hikes down the road.

Minutes of the Fed's July meeting indicated a hawkish bias and next week's meeting will likely further confirm that. A constructive reference to the economy in the statement that discounts the August jobs report will likely get interpreted as having a hawkish bias. The Fed Chairwoman's news conference after the meeting will also clarify the committee members' thinking.

The recent uptrend in benchmark treasury yields, albeit from low levels, and strengthening greenback are reflecting this market expectation. The U.S. dollar is currently at a 6-month high against the Japanese yen and at a 14-month high against the euro, reflecting the emerging divergence in the developed world. This trend has the potential of becoming a headwind for stocks, as a period of policy uncertainty replaces a multi-year period of favorable policy certainty.  

In corporate news, Apple AAPL and Microsoft MSFT will likely remain in the limelight. Apple's shares moved up with the big product announcement on Tuesday, but lost ground towards the end of the session. It will be interesting to see how the stock behaves in today's session even though it's indicated to open modestly in the red. Microsoft is reportedly in talks to purchase the Swedish maker of the popular Minecraft game for $2 billion. Hard to tell at this stage what this purchase means for the company strategically, but it seems like a way for the company to use its enormous offshore cash holding.

Sheraz Mian
Director of Research

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