Ahead Of The Fed: What Will The FOMC Meeting Bring?

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Includes: DEM, DXJ, EEM, EMB, EMLC, EWG, EWJ, FDX, GEM, HYEM, IEMG, IVV, SCHE, SPEM, SPY, VOO, VWO
by: The Fortune Teller
Summary

It's "Fed Day" today, and investors are hoping that it's not going to end like "Fed-Ex yesterday."

Inflation is weakening, although core CPI is still running above the Fed's long-term target.

Non-farm payrolls came in way below market expectations, but jobs openings are at record highs.

It's a mixed picture out there, and for that reason it's unlikely for the Fed to be as dovish as the market is hoping for.

(Important Factors) Ahead of the Fed...

It's "Fed Day" today (Wednesday, March 20) and as always is the case, investors will be glued to screens, waiting to hear the exact wording of the FOMC announcement, but mostly analyzing the additional written ("dot plot") and verbal (Powell's press conference) data.

We believe that it will be hard to impossible for the Fed to please investors this time round. As we wrote earlier today in our "2019, Thus Far, Is Delivering The Best Start To A Year Since 1987" piece:

Economists have generally been expecting more Fed rate hikes than the market, but even they don’t see more than one more rate hike this cycle

It will be hard for Fed Chairman Powell to really impress stocks at this point, given the already elevated, i.e., very dovish, expectations out of the Fed. Consensus now anticipates no more rate hikes in 2019, with normalization ending as early as September this year, at ~$1.3T reserve balance.

To exceed those expectations, the Fed's "dot plot" would need to have no dots at all, neither in 2019, nor in 2020 with reserves at ~$1.4T by September or earlier.

Possible? Perhaps, but surely not probable.

Are you ready for FOMC meeting outcomes? The S&P 500 (SPY) gained 1.55% on the last Fed Day (FOMC meeting on Jan. 30), which ended a streak of 18 Fed Days in a row without a 1%+ gain for the index.

Source: Bespoke Investment Group

As shown in the above chart, that was the longest stretch ever, since 1994, when the Fed began announcing its policy decisions on the same day as its meeting.

Before going to bed, let's look at few things that are likely to affect the Fed:

Core CPI

US Core CPI (inflation excluding food and energy) has moved down recently to 2.1%. It has been below its rolling historical median (currently at 2.7%) since December 1991!

US Inflation ("CPI")

Current US CPI, on a TTM (Trailing twelve Months) basis, is only 1.5%. Not only this is below the Fed official target, but it's also the lowest Y/Y change since September 2016.

Furthermore, the current 1.5% annual rate is only about half of the long-term rolling median (currently at 2.9%).

CPI: US vs. Germany

Believe it or not, but the German (EWG) inflation, at 1.6%, is higher than the US inflation, at 1.5%. Yet, while US two-year yield is 2.47%, the German two-year yield is -0.55%...

Global Inflation Rates

The US is at the middle of the pack here.

Asian countries, led by Japan (EWJ, DXJ), have the lowest inflation rates, while emerging markets (VWO, IEMG, EEM, SCHE, SPEM, DEM, GEM, EMB, HYEM, EMLC), led by Latin American countries, are seeing the highest inflationary pressures.

Fed Funds Rates

While the effective Fed funds rate is currently 2.4%, core CPI is at 2.1%. This means that real Fed funds rate is 0.3%. If you think this is low - think again - that's the highest level since February 2008.

Basically, the market is saying that the Fed is done hiking. If that's true, it would be lowest terminal real Fed funds rate of any cycle.

Non-Farm Payrolls

US new jobs are up 1.69% year-over-year, just where the average year-over-year growth over the past three years is (1.68%).

The mere 20k gain of new jobs last month might be a one-off, but it could also be an early signal that a depression is coming.

Jobs Openings

In 2009, the number of unemployed people in the US exceeded the number of job openings by almost 13 million.

Today, the number of job openings exceeds the number of unemployed people by about 1.4 million.

Rate Hike Probability

Following the weak payroll report, the market is now pricing in a 33.1% (!) probability of a Fed Rate CUT over the next ten months (i.e. next eight FOMC meetings, until and including the one ending on Jan. 29 2020)...

Market is pricing in a 33.1% (!) probability of a Fed Rate CUT over the next ten months

Source: CME Group

(Few Thoughts) Ahead of the Bed...

The Fed Model itself, which is based on the partially-inverted yield curve, is currently assigning a 24.6% probability for a recession over the next 12 months.

That's the highest probability since... 2007...

Another indicator that points to a slowing economy is the Cass Freight Index.

The Cass Freight Index is a measure of monthly freight activity, widely used by analysts and economists as an indicator of North American economic trends.)

Speaking of freight, let's move from one Fed to another (Fed-Ex)...

In case you've missed it, Fedex (FDX) - a company that's considered a very reliable whistle-blower for the state of the economy - just published its Q3 earnings (the third quarter ended on February 28th) and it wasn't a pretty/encouraging view, to say the least.

As a result, the share price is down circa 6% in after-hours trading.

Source: Seeking Alpha

But it's certainly not all doom-and-gloom out there. For example: US credit growth is above 10%! That's a very good reading, at least for GDP growth in the short term.

In the long run, we might bump into more difficulties as a result of the increased leverage.

Bottom Line

The Fed isn't going to raise rates today, but it's also unlikely to commit to no rate hikes anymore.

Jerome Powell is going to sound dovish, but not dovish enough as the market may wish him to be.

The "dot plot" will have much less dots, but it's unlikely for both 2019 and 2020 to be spotless.

All in all, we believe there are good chances for investors to (at least slightly) disappoint today. Taking into consideration that the markets are having their best start to a year since 1987, we believe that it's more prudent to avoid putting new money to work in the market at this juncture.

Of course, the >$11B that went into the three biggest ETFs that are tracking the S&P 500 Index (SPY, VOO, IVV) last week (the most since the five days ended Sept. 21, 2018), think differently.

Same goes for the total $27.3B ( second largest inflow on record!) that went straight into equity funds during the week ending on March 13.

Let's wait and see what will today's FOMC meeting bring?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.