Fed In Focus: Investors Await Minutes For Possible Deeper Dive Into Inflation

With news a little sparse in the early going, it looks like Wednesday’s session could be a countdown to Fed minutes. Those nuggets of the Fed’s deep thoughts emerge at 2 p.m. ET, and pre-market trading saw signs of recovery following Tuesday’s losses.

European markets were flat to lower early Wednesday after some gains in Asia overnight, while oil prices pulled back as the dollar clawed higher. Over in the interest rate complex, 10-year Treasury bond yields remained under 2.9%, though not by much, after posting a new four-year high yesterday of 2.93%.

From a stock market perspective, one question going into today’s trading is whether the Dow Jones Industrial Average ($DJI) can climb back above the 25,000 mark. Stocks are still trying to find a new trading range here in the third week since the early-February sell-off.

Fed minutes look like the order of the day, but before that investors will get a look at existing home sales for January. In addition, Minneapolis Fed President Neel Kashkari and Philadelphia Fed President Patrick Harker are scheduled to speak today.

The Fed minutes could give investors a bit more insight into the Fed’s thinking as of late January, when it decided to leave rates unchanged but also delivered some words that sounded like a veiled warning about inflation. The somewhat hawkish language arguably played a role in the stock market sell-off that began just two days after the Fed’s meeting, the last under previous Chair Janet Yellen. The thing investors might want to look for today is any additional language around inflation, because that’s the big concern now as Chair Jerome Powell takes the helm.

As of Wednesday morning, the futures market pointed to an 83% chance of a rate hike by next month, with a total of three hikes this year most likely. Chances of a fourth hike by the end of 2018 have remained at around 25% for several weeks now, futures prices indicate.

The minutes come as the Treasury plans to raise nearly $260 billion in a series of auctions this week. Investors might want to keep an extra close watch on yields as those auctions proceed, because it might give a hint at the level of demand for the new debt.

Yesterday’s stumble broke a six-session win streak for the major indices. The instigator seemed to be disappointing earnings from Walmart Inc WMT, but the company’s results were actually kind of mixed. The wound to earnings per share looked self-inflicted in that the company said it was going to draw down a little bit this quarter because it needed to improve technology on its web site. It still expects 40% growth in e-commerce sales this year, so it’s probably a little too early to count WMT out based on one weak report.

Investors have a chance to become better educated about the retail ecosphere over the next few weeks as WMT competitors like Target Corporation TGT report. Kohl’s Corporation KSS is another one to watch. If other retailers do OK, that would tend to put WMT’s miss in context. However, if other retailers also disappoint, it could reinforce some of the questions about consumer health that surfaced last week after tepid retail sales data for December and January.

Volatility remains a factor today, with the VIX “fear index” still above 20 as of Wednesday morning. That said, it didn’t spike late yesterday when selling picked up in stocks, perhaps a sign that some of the more choppy stuff might be behind us. Even so, things remain in flux, and now isn’t necessarily the time for investors to let up their guard.

FIGURE 1: THE DOW AND THE DOLLAR. This year-to-date chart compares the Dow Jones Industrial Average ($DJI, marked by the candlestick), to the dollar index (blue line). Note that the DJIA's step back yesterday after six straight days of gains coincided with signs of life in the dollar. Data source: CME Group, Dow Jones & Co. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Greenback Comeback

One head-scratcher about recent market action was the dollar’s descent in the face of higher yields in the interest rate complex. The dollar typically gains strength when rates rise. Instead, even as yields reached four-year highs recently, the dollar index fell to multi-year lows below 89. Weak retail sales data last week might have added to the dollar’s woes.

However, things turned around a bit on Tuesday, as the dollar and yields seemed to get back into sync and rise together. The dollar arguably has other reasons to rebound aside from rising rates, which often imply a tightening monetary supply. U.S. economic data has generally been pretty good over the last few weeks, and that usually tends to help the dollar. Corporate earnings, other than Wal-Mart miss early this week, have mostly exceeded Wall Street’s expectations. Other factors weighing on the dollar, including rising expectations for more pullback in monetary stimulus abroad, might have been factored in over the last few months.

Gold Takes a Hit

Time to open up the vaults and see what’s going on with gold. Tuesday saw a big dip in fortune for the yellow metal after it climbed to nearly five-year highs the previous week. All the recent market craziness might have sent some investors running for the “safe haven” of the gold market, sending it to levels not seen since mid-2016. Now, with the stock market settling down a bit, gold could be running out of steam. Higher interest rates and a climbing dollar typically send gold the other direction, and that seemed to be the case Tuesday. However, gold can’t be counted out, considering volatility remains high and the dollar remains relatively sluggish. Whatever happens from here, gold has climbed out of its trading range of between $1,200 and $1,300 an ounce, levels it stayed between for much of the last two years. It hasn’t fallen below $1,300 so far this year.

Bumps and Bruises Ahead?

If you’re hoping the market settles down and spends the rest of the year trading like it’s 2017, you may find yourself disappointed. That’s the conclusion of CFRA analyst Sam Stovall, who looked back at historical patterns and said he expects additional surges of volatility in the weeks and months to come. Stovall, in a research note this week, noted that the S&P 500 (SPX) has already racked up more days of 1% or greater declines or gains since Jan. 1 than it did in all of 2017. He thinks we’re in for five times the year-to-date count of these “1% days” in the rest of 2018, and doesn’t discount the possibility that the SPX might re-test or even fall beneath its February lows at some point during the year. “We advise investors to prepare for the likelihood of multiple 5%-plus declines this year,” Stovall wrote. The last year to experience two SPX declines of 5% or more was 2014. The last year with three was 2009. In addition, there have been years with four declines of 5% or more, most recently in 1997 (the low for the final one came in early 1998).

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