Even with trade-related headlines hovering over markets—particularly in regard to any tariffs imposed on China—market participants will pivot their focus to the Federal Reserve’s Open Market Committee (FOMC) meeting, Prudential’s Chief Market Strategist Quincy Krosby said Monday in her weekly “Connecting the Dots” outlook.
The two-day meeting will culminate with a press conference, the first for newly installed Fed Chairman Jerome Powell. Key for markets will be the assessment of the economy and the path of interest rate hikes as the Fed continues to normalize rates.
“The question that will keep analysts around the world up all night will be, ‘What are the possibilities of more than three rate hikes this year?’” Krosby said. “You’ll get a sense of it in the statement that comes out from the Fed.”
The market has already absorbed the possibility of three rate moves for 2018, the first of which is fully expected to be announced this week. However, nothing is set in stone. In 2015, four rate hikes were anticipated under Fed Chair Janet Yellen; in fact, the Fed only delivered one.
Does this meeting introduce a more hawkish stance from the FOMC with the possibility of a fourth rate hike? This is where markets—currencies, commodities, fixed income, equities—are seeking clarity.
“The Fed has to absorb the effect of the fiscal stimulus,” Krosby said. “Clearly we’re seeing inflation beginning to pick up, and the question remains whether it will meet or exceed the Fed’s target of 2 percent. Pay attention to the 10-year yield, the 2-year yield, as well as the U.S. dollar and gold—if they believe inflation is kicking in and the Fed is turning hawkish, we’ll see them react.”
Beyond the Fed, the data that could move the markets, especially the 10-year yield, will be on Friday, when we get the durable goods numbers and new home sales.
On Sunday, 45 trade associations sent a letter to the president urging him not to impose any tariffs against China, but there are other issues emanating from Washington, Krosby said.
“This is a market that is vulnerable to headlines coming out of Washington, whether it impacts part of the day’s trading or the whole,” Krosby said. “Markets love certainty: this is where we are, this is where we’re going. Sometimes you don’t know and the market has to sort things out.”
Earnings releases to watch:
This week’s data releases:
Tuesday: FOMC begins two-day meeting
Wednesday: FOMC announcement and press conference; Existing Home Sales
Thursday: FHFA House Price Index; PMI Composite Flash; Leading Indicators
Friday: Durable Goods; New Home Sales
Read Quincy Krosby’s full Q1 Market Commentary: Turning the Page.
The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.