All eyes will likely be on the Federal Reserve’s Open Market Committee (FOMC) meeting at 2:00 P.M. (EDT) this afternoon. The central bank is expected to hike the benchmark short-term interest rate and comment on general economic conditions, as it attempts to slow down demand and price inflation.
The Fed guided this meeting to a 50-basis point hike just six weeks ago at the May FOMC policy meeting, but last Friday’s May consumer prices report showed a 12-month gain of 8.6%, representing the highest inflation rate since 1981. This increase has caused traders to think greater hikes are necessary to combat inflation, and they are pricing in a 75-basis point hike at today’s meeting, which would be an acceleration from the 50-basis point increase that the Fed announced at the May meeting. This increase in odds has roiled the markets and has been a key factor in the rapid decline over the past few days.
In addition, Federal Reserve Chairman Jerome Powell will be answering questions after the decision is released, and his responses should give further insight into the Fed’s decision-making processes. Looking further down the road, traders are pricing high odds of federal funds rates of between 3.50% and 4.00% by December, suggesting further sizable hikes will occur in the coming meetings. Overall, changes in the interest-rate policy and outlook will likely gyrate the stock market in the days ahead.
The futures markets started in the green yesterday evening after a mixed day of trading. There was some bargain hunting likely at play following the large declines on Monday, but sentiment shifted lower throughout Tuesday’s session, and the indices made a series of lows. When the day was over, the S&P 500 was down 14 points and the Dow Jones Industrial Average was 152 points in the red. Conversely, the NASDAQ held up a bit better and finished the day up 19 points, though little progress was made in reversing Monday’s sharp selloff. The futures market then drifted lower through the overnight hours before recovering in the early morning, and is now well in the green, suggesting a positive start to the trading day.
Yesterday, market breadth was rather negative, as decliners outpaced advancers by a 1.7-to-1.0 ratio. Technology stocks were among the best performers, though, while interest-rate sensitive utilities and consumer staples equities were among the laggards.
In commodity news, oil prices traded flattish through the session yesterday, taking a breather after several days of higher price action. Meantime, U.S. Treasury bond yields were a mixed bag, as a few short-term rates rose, while long-term durations fell. Several short-term rates remain higher than the 30-year Treasury bond yield, and this inversion is negative for financial companies’ earnings. The CBOE Volatility Index (VIX) pulled back a bit yesterday, but remained not far from recent highs, suggesting only a minor decline in demand for options protection.
Looking ahead, several economic reports are on the docket in the days ahead. These include initial jobless claims and housing starts on Thursday, while industrial production and leading economic indicators will be released on Friday. On the earnings front, very few companies are set to release earnings in the days ahead. This suggests that traders will largely be focused on any sentiment changes, especially interest rates and their long-term outlook.
– John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
