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Market Brief: 3 things to watch at this week’s Fed meeting

With stock and bond markets in a big air pocket thanks to a hotter than expected inflation report, all eyes are on this week’s Federal Reserve meeting.

In the markets, the response was once again to raise expectations about the aggressiveness of the Fed to control inflation. The question is how the central bank itself will react when it announces its decision on Wednesday afternoon, and what officials will signal as to their thinking on future rate hikes.

The spark of all this was a disappointing reading on inflation in August’s Consumer Price Index report. Many market players were looking for further signs that inflation was finally starting to subside. While the CPI only rose 0.1% in August, the so-called core inflation rate rose 0.6%, more than expected, from July.

This triggered a sharp drop in the stock and bond markets. The Morningstar U.S. Market Index fell 4.81% during the week, its worst performance since mid-June, when stocks bottomed out in the bear market.

Bond yields, meanwhile, continued to climb. The yield on the 10-year US Treasury rose to 3.4% from 3.3% a week earlier. The movement was more pronounced among short-term bonds and more directly affected Fed policy changes. 2-year Treasury yields rose from 3.6% to 3.8%.

Against this backdrop, what should investors focus on at the Fed meeting?

1. Expect another big price hike

The Fed has already hiked rates more aggressively than at any time in the past four decades, taking the federal funds rate from zero at the start of the year to its current target of 2.25%. This included unprecedented back-to-back fund rate increases of 0.75 percentage points.

Following the CPI report, markets raised their expectations around the Fed meeting and now expect another three-quarters of a point increase instead of 0.50 percentage points.

“The decision looks very firm, going from 50 basis points to 75 basis points,” said Jan Nevruzi, US rates strategist at NatWest Markets. “Our forecast is that they will go with 75 basis points at this meeting, probably maintain that pace in November and maybe come back to 50 basis points in December.”

2. Look at the dot chart

With expectations centered on another big rate hike in September, the question facing markets is how far the Fed will raise interest rates before they pause or even drop. they don’t start turning them down. For clues, look at what Wall Street calls “dot plots.”

The dot plots reflect the individual screenings Fed officials on economics and interest rates. Although these simply reflect expectations and do not define the direction the policy will take, investors will be able to get a sense of the direction. The main projections to watch will be those on inflation and unemployment. The projections for the fed funds rate will be of particular interest.

“I would look at the point charts…and what they expect for the end of this year and next year,” says Nevruzi. “The dot chart could show a number like 4.125% (for the end of the year) and 4.50% next year, and once that happens markets tend to follow that price.”

Dot chart showing long-term forecasts of FOMC members' federal funds rates and Fedwatch CME futures.

3. Inflation outlook

All of this will be underpinned by the Fed’s discussion of the inflation outlook in Fed Chairman Jerome Powell’s announcement, projections and press conference on Wednesday afternoon. A crucial question is how the Fed will characterize the latest inflation report. Analysts note that the CPI’s problem areas were in costs that tend to move slowly, such as rent or health care. The question then becomes how confident the Fed is that inflation will tend to fall towards its target rate of 2%.

In addition, the Fed’s view on wage pressures will be important, says Kathy Jones, chief fixed income strategist at Charles Schwab. “The Fed is very, very focused on wage gains, and those are still high,” she says. “If all of this is demand destruction, we’re going to have to see wage growth slow.”

Events scheduled for the coming week include:

  • Monday: AutoZone (AZO) brings earnings.
  • Tuesday: start of the meeting of the Federal Reserve’s Open Market Committee.
  • Wednesday: The FOMC meeting ends. General Mills (GIS) brings income.
  • Thursday: FedEx (FDX)Costco (COST)and Lennar (LEN) report earnings.

For the trading week ended September 16:

  • The Morningstar US Market Index fell 4.81%.
  • All sectors were down for the week, with Basic Materials, which fell 7.00%, and Technology, down 6.29%, falling the most.
  • Yields on the 10-year US Treasury rose from 3.32% to 3.45%.
  • West Texas Intermediate crude oil prices fell 1.94% to $85.11.
  • Of the 851 U.S.-listed companies covered by Morningstar, 63, or 7%, were up and 788, or 93%, were down.

Which stocks are rising?

Chinese data center operator VNET Group (VNET) rallied on news that founder Josh Sheng Chen had made an offer to take the company private at $8.20 per ADR share. Shares closed the week at around $6.

A handful of consumer cyclical stocks also ended higher, led by Poshmark (CHIC)NIO (NIO)and Volkswagen (VWAGY)which recently announced its intention to launch an IPO of its Porsche subsidiary.

Travel and leisure stocks rose with Royal Caribbean (RCL) and Norwegian Cruise Line (NCLH) up for the week. Stocks of gaming companies Melco Resorts and Entertainment (MLCO) and the sands of Las Vegas (LVS) also won.

Chart highlighting some of the stocks that performed well during the week of September 16.

Which stocks are down?

Adobe (ADBE) plunged after news broke that the content-creation software company would buy privateer competitor Figma for $20 billion. The deal sets Figma’s price at 50 times its annualized recurring revenue.

FedEx (FDX) disclosed preliminary results that led to a sell-off by investors. The logistics company said parcel volume fell faster than expected in its fiscal first quarter, while earnings per share were $3.44, below estimates of $5.14.

“Global volumes declined as macro trends worsened significantly later in the quarter, both internationally and in the U.S.,” FedEx Chief Executive Raj Subramaniam said in a statement. . statement. “We are tackling these headwinds quickly, but given the speed at which conditions have changed, the first quarter results are below our expectations.”

The company is expected to release its fiscal first quarter results on September 22. United Parcel Service Stocks (UPS) also fell.

Also among the worst performers in the past week were technology and communications services companies such as Altice (OURS)MongoDB (MDB)western digital (WDC)and meta-platforms (META).

Line chart showing some of the worst performing stocks during the week of September 16.