FOMC Likely to Issue a Hawkish Hike

Sep 24, 2018

FOMC Rate Decision Headlines Busy Week

The main event this week will be the updated guidance coming out of the FOMC meeting. Although there are nagging concerns (tariff/trade tensions, housing slowdown, etc.), the domestic economy continues to motor along with an ever-tightening labor market, record high consumer sentiment, and inflation nearing the 2% benchmark. While a rate hike is a certainty, updated economic and rate forecasts are likely to be revised higher which will argue for continuing hikes. We see the likelihood of a bearish market response to what has the earmarks of a hawkish hike. In addition, recent speeches have touched on the neutral rate (currently around 2.50%-3.00%). In the forecasts, the Fed may disabuse the market of the notion that they may pause at that level which will only add to the hawkishness.

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Economic Calendar

Top 5 Events for the Week

SEPT. 24 - 28, 2018

1. FOMC Rate Decision — Wednesday
2. August Personal Income & Spending — Friday
3. August New & Pending Home Sales — Wed./Thurs.
4. August Advance Goods Trade Balance —Thursday
5. September Consumer Confidence — Tuesday

1. FOMC Rate Decision—Wednesday

While a 25bps rate hike is a certainty on Wednesday, updated economic and rate forecasts are likely to be revised higher which will argue for rate hikes continuing beyond previous forecasts. That provides the possibility of a bearish market response to what has the earmarks of a hawkish hike. In addition, recent speeches by influential Fed members have touched on monetary policy and the neutral rate (currently around 2.50%-3.00%). In the forecasts, the Fed may disabuse the market of the notion that they may pause after hitting the neutral rate. Lael Brainard argued that given the momentum in the economy, and the potential for financial market excesses to develop, that exceeding the long-run neutral rate (2.875%) may be appropriate. If the updated forecasts and/or press conference statements allude to that possibility it will be another bearish indicator for the market. Thus, we go into the meeting expecting a negative market reaction with new cycle lows in the 2yr/10yr spread a possibility.

2. August Personal Income & Spending —Friday

The Friday release of the Personal Income and Spending numbers for August will give us a look at the momentum of both metrics in the middle of the third quarter. Personal income is expected to rise 0.4% after a one-month downtick to 0.3%. Personal spending is expected to rise 0.3% which would be the lowest spending gain since February’s –0.1%. Real spending—adjusted for inflation— is expected to increase 0.2% matching the July increase. The Core PCE (YoY) inflation measure is expected to remain at 2.0% for the second straight month. In all, a fairly steady-as-she-goes report as to consumer income and spending and that shouldn’t move GDP expectations of 3.0% by any material amount.

3. August New & Pending Home Sales—Wednesday/Thursday

Recent housing-related releases have disappointed or failed to convincingly beat expectations and while not representing material drop-offs they give the appearance that housing activity has plateaued with the combination of modest wage gains, home price appreciation, low inventories, and higher interest rates all conspiring to reduce housing affordability. Pending home sales are based on contract signings so they represent a leading indicator to new and existing home sales a month or two later when the contracts close. Sales for August are expected down -0.2% compared to -0.7% in July. Meanwhile, new home sales for August are expected to inch up 0.5% versus the –1.7% decline in July. In summary, the two series are expected to continue the recent trend of tepid activity.

4. August Advance Goods Trade Balance—Thursday

With trade war rhetoric a daily occurrence the monthly look at the goods trade deficit has become equal parts political and economic. The goods trade deficit was -$64.5 billion in August 2017 and is expected to be –$70.6 billion in August 2018. The deficit began the quarter at -$67.9 billion, so the expected widening to -$70.6 billion indicates the goods trade sector will subtract from third quarter GDP if the widening of the trade deficit persists through September.

5. September Consumer Confidence—Tuesday

Despite headlines of trade wars, political intrigue and a plateauing housing market consumer sentiment continues higher with each month setting a new cycle high. The Conference Board’s September Consumer Confidence reading is likely to show much of the same with an expected print of 132 which is just a notch under the August 133 print. That August print was well above the July 128 reading so some regression might be expected but it appears it will be very little. Part of the yield increases in September owe to the increasing sentiment readings despite tariff headlines and other political concerns.

Conference Board Consumer Confi