It's Fed day, and markets traded flat ahead of this afternoon's announcement. While most economists don't expect the Fed to make any interest rate moves today, futures markets are pricing in increases later this year, and investors await the Fed's economic projections and policy statement Wednesday afternoon to get a better sense of how things might play out.
The Fed announcement is scheduled for 2 p.m. ET today, followed by a press conference at 2:30 p.m. ET by Fed Chair Janet Yellen.
The question is whether the Fed gives investors any hints as to future rate increases and their timing, and what sort of message it sends to the market about its projections for the economy. Futures markets that track the probability of a Fed move point to a zero percent chance of an interest rate hike at this week's meeting, but dial in an approximately 50% chance of a rate hike at the Fed's June meeting and a 67% chance at the September meeting. Just a month ago, many economists were predicting no rise in rates until early 2017, but market strength and economic data since then have helped change perceptions. We saw the Fed in December raise rates for the first time in nearly a decade, even as overseas central banks have been lowering rates to negative levels.
The Consumer Price Index (CPI) and housing starts came out before Wednesday's open, giving the Fed two more data points to consider. Housing starts rose 5.2%, and CPI fell 0.2%. Single-family housing starts hit the highest level in nearly nine years. The CPI number was in line with expectations, but focus was on the core CPI number, which rose 0.3% and was above consensus expectations. The core number excludes volatile food and energy prices.
Volatility remained low on Tuesday, with VIX futures staying below 17. The late week includes the potential added volatility of "quadruple witching"-the expiration of futures and futures options on top of stock and index options. Trading was very muted Tuesday, with major averages hovering near unchanged at the close. Overseas trading stayed light.
One interesting thing to note is that there was some decoupling of crude oil and the S&P 500 (SPX) over the last few days. Crude fell around 5% between Friday and Tuesday, whereas the SPX is only down slightly. The question is whether this remains the case or if the market returns to the 85% to 90% correlation between the SPX and oil that the Street has become used to in 2016. Oil was slightly higher early Wednesday as producers announced an April meeting to discuss a production freeze.
Figure 1: SPX Down Two-Straight Days Ahead of Fed: The S&P 500 (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim platform, had its second-consecutive lower close, diverging from the Dow Jones Industrial Average (DJIA) which closed slightly higher. Data source: Standard & Poor's. For illustrative purposes only. Past performance does not guarantee future results.
Retail Sales, PPI Reflect Cautious Consumers: Tuesday's retail sales and Producer Price Index (PPI) reports both showed some weakness, perhaps reflecting caution on the part of consumers. Retail sales fell 0.1% in February, compared with expectations for a 0.2% fall; and PPI fell 0.2%, in line with consensus. The retail sales report, however, is worth probing beyond the headline number. Excluding motor vehicles and gasoline, retail sales actually grew 0.3% last month. And sales rose in certain categories, including restaurants and bars, sporting goods, and clothing. Even so, this marked another month of falling retail sales overall, and follows the recent monthly jobs report showing lower wages and a shorter average workweek. Economists quoted by the media said it doesn't seem consumers are going out and spending the savings they've achieved from cheap gasoline.
Business Survey Turns Positive: The March 2016 Empire State Manufacturing Survey, released Tuesday by the Federal Reserve Bank of New York, delivered its first positive reading since last July, rising 17 points to 0.6. And indexes for the six-month outlook indicated that conditions are expected to improve in the months ahead, with the index for future new orders rising to its highest level in more than a year. The data come from a monthly survey of manufacturers in the state of New York, one of the largest states in the country.
DJIA Rises As S&P 500 Falls: For the second-consecutive day Tuesday, the Dow Jones Industrial Average managed to finish with slight gains while the S&P 500 (SPX) index closed with slight losses. The DJIA's strength Tuesday came in part from shares of DJIA component Apple (NASDAQ:AAPL), which rose 2% to a two-month high above $104 after a Morgan Stanley analyst said first-quarter iPhone sales look stronger than Wall Street had expected, the Associated Press reported.
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