Waiting To Not Be Surprised By The Fed

Today is the FOMC decision day. That decision will be out at 2:00 p.m. ET. It is also the day when market participants will see an updated Summary of Economic Projections and hear from Fed Chair Powell, who will hold a press conference at 2:30 p.m. ET to discuss the FOMC’s thinking. 

What we can say confidently at this time is that the stock market has no fear of what it will see and hear today. To wit:

• The Russell 2000 is up 8.4% this month and the S&P Midcap 400 Index is up 7.3%.
• The Equal-Weighted S&P 500 is up 5.7% this month.
• The Nasdaq Composite is up another 4.9% this month, leaving it up 29.7% for the year. The Nasdaq 100 is up another 4.5% this month, leaving it up 36.2% for the year.
• The Dow Jones Industrial Average is up 4.0% this month.
• The CBOE Volatility Index is down 18.6% this month to 14.60, trading at its lowest level in more than three years.
• The CME FedWatch Tool shows a mere 5.8% probability of the Fed raising rates by 25 basis points today.

Thanks to copious previews of this Fed decision, the stock market has a pretty good line on what it expects to see and hear today:

• A policy vote that has a dissent or two.
• A dot-plot that projects at least one more rate hike before the end of the year.
• A Fed Chair who will say inflation has shown signs of progress but remains too high, warning that a “skip” today does not necessarily mean the Fed is done raising rates, particularly if inflation remains sticky well above the Fed’s 2.0% inflation target.

If the FOMC and Fed Chair Powell live up to the stock market’s expectations, then there should be little reaction to the news itself since none of it will truly be a surprise. Then again, the stock market has run big ahead today’s happenings, so a sell-the-news reaction is not out of the question.

The depth and tone of the selling, though, should be proportional to the news itself. If everything lines up as expected, then it is apt to be relatively modest and orderly. If there is, in fact, a hawkish surprise, then the selling should look more frenetic.

All that said, this stock market could still keep keeping on, too, if there are no surprises. It certainly has shown a lot of verve of late, energized by the notion that the economy can avoid a hard landing, that the Fed is close to being done with its rate-hike campaign, and that an AI boom is beginning to unfold.

Today, then, will be a price action day so to speak, as participants watch closely how the market responds to the information that it thinks it knows is coming.

There wasn’t much reaction to a May Producer Price Index that produced some relatively good wholesale inflation news. The index for final demand declined 0.3% month-over-month (Briefing.com consensus -0.1%) while the index for final demand, less foods and energy (“core PPI) increased 0.2% month-over-month, as expected.

On a year-over-year basis, the index for final demand was up 1.1% year-over-year, versus 2.3% in April, and the index for final demand less foods and energy was up 2.8% year-over-year, versus 3.2% in April.

The key takeaway from the report is the recognition that wholesale inflation is moving in the right direction, which should be pleasing to the Fed and a reprieve for corporate profit margins.

The lack of reaction to this good news is likely due to the positive reaction to yesterday’s Consumer Price Index, which is to say the good news in the PPI report today was captured in the response to the CPI report yesterday. Also, market participants are more pre-occupied today with the Fed decision.

Separately, UnitedHealth (UNH) investors are looking pre-occupied and a bit perturbed by the company’s acknowledgment that its Q2 medical care ratio is expected to be moderately above the upper bound of its full-year outlook. Shares of UNH are down 5.8%, which is a primary reason for the underperformance of the Dow Jones Industrial Average futures. Its warning is also dragging down other managed care stocks.

Currently, the S&P 500 futures are up three points and are trading fractionally above fair value, the Nasdaq 100 futures are up seven points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are down 89 points and are trading 0.2% below fair value.

Originally Posted June 14, 2023 – Waiting to not be surprised by the Fed