Fed for thought
03/19/18

This week’s trading is likely to hinge around the Fed’s interest rate decision, which may provide the necessary spark to push the broad market out of its choppy consolidation and challenge its previous highs.

Last week stocks took a breather, with the S&P 500 (SPX) closing down four days in a row—a longer (but much smaller) losing streak than the index experienced during last month’s correction. A small rally on Friday snapped the down streak, though.

S&P 500 (SPX), 12/8/17 – 3/9/18. S&P 500 index daily chart

Source: OptionsHouse

Barring surprises, trading this week is likely to be relatively quiet until the Fed concludes its meeting on Wednesday. The prevailing market consensus is for a 0.25% increase in the Fed funds rate. However, as recently as March 9 Chicago Fed chief Charles Evans argued against a hike, citing his preference for a clearer uptick in inflation before raising rates again.1 Last week’s Consumer Price Index (CPI) and Producer Price Index (PPI) readings were in line with expectations and showed little evidence of increasing inflation.

Small-caps did the best job of holding their ground last week, with the Russell 2000 (RUT) moving out of the cellar for the year and the Dow Jones Industrial Average (DJIA) taking its place. Here’s the breakdown for the major US indexes:

Index Comparison

Source: OptionsHouse

In terms of S&P 500 sector performance, there was some rotation toward previously lagging areas of the market, with Utilities (+2.7%), Real Estate (+1.4%), and Consumer Discretionary (-0.5%) coming out on top. All other sectors were in the red for the week, with Materials (-3%), Financials (-2.1%), and Consumer Staples (-1.9%) posting the biggest losses.

Last week’s individual fireworks included ULTA Beauty’s (ULTA) moonshot on Friday after Thursday’s after-market earnings, which missed estimates but still showed strong year-over-year sales growth. The stock jumped almost $16 to close the session up nearly 8%.

There was softness in some of last week’s economic data—housing numbers and retail sales were weak—but industrial production and business inventories were stronger than estimated. This week will finish off most of the month’s housing numbers, but the focal point will be the Tuesday-Wednesday Federal Open Markets Committee (FOMC) meeting, with the Fed’s announcement on interest rates due at 2 p.m. ET on Wednesday:

Tuesday: FOMC meeting begins 

Wednesday: Current Account, Existing Home Sales, FOMC announcement

Thursday: FHFA House Price Index

Friday: Leading Indicators, Durable Goods Orders, New Home Sales

Currencies (FX) dominate the week’s expiring futures contracts:

Monday: March Australian dollar (ADH8), March British pound (BPH8), March U.S. Dollar Index (DXH8), March Euro FX (ECH8), March Japanese yen (JYH8), March Swiss franc (SFH8), March coffee (KCH8)

Tuesday: April crude oil (CLJ8), March T-bond (USH8), March Canadian dollar (CDH8)

A light week of earnings is peppered with a few well-known names (including some homebuilders—keep an eye on those housing numbers):

Monday: HealthEquity (HQY), Oracle (ORCL)

Tuesday: Lennar (LEN), The Children's Place (PLCE), FedEx (FDX)

Wednesday: General Mills (GIS), Winnebago (WGO), Five Below (FIVE), Herman Miller (MLHR), Wheaton Precious Metals (WPM)

Thursday: Accenture (ACN), ConAgra (CAG), Darden Restaurants (DRI), Cintas (CTAS), KB Home (KBH), Micron (MU), NIKE (NKE), SMART Global (SGH)

You can find a complete list of earnings and other market events on the E*TRADE market calendar (login required).

Whatever their outcome, Fed meetings are almost always good for a little market action—but sometimes it really is just a little. Overall, the market tends to hold its breath a bit before Fed announcements and exhale afterward. For the past 24 two-day FOMC meetings (dating back to 2015), the SPX’s median move from the close of the announcement day to the close of the day after it was 1.24 times the size of the median move for the two days before the announcement. Also, between the announcement day and the days before and after it, the day before an announcement was the most likely to close up (63%), the day after it was the least likely (46%), and announcement day closed up 58% of the time.

 

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1 CNBC.com. Fed's Charles Evans goes out on a limb, argues against a March rate hike. 3/9/18.