The Federal Reserve is expected to raise interest rates by another three-quarters of a point Wednesday, but it is what it signals about future rate hikes that will drive markets. The central bank’s two-day meeting Tuesday and Wednesday comes in a week where investors will also be on high alert for more guidance about corporate earnings ahead of the next reporting season in October. FedEx rattled the market after it withdrew its full year earnings guidance Thursday, warning about global softness in its delivery business. Stocks were sharply lower on the week, with the S & P 500 down by more than 5.3% as of Friday afternoon. The stock market’s tone soured dramatically after Tuesday’s release of the consumer price index, which showed inflation to be hotter and more pervasive than expected in August. A multi-day rally came to an abrupt halt, and the Dow lost 1,276 points, or almost 4%, in the worst stock market day since June, 2020. After the CPI, markets shifted to price in an even more aggressive Fed rate hiking path. That accelerated the wild ride higher in shorter duration Treasury yields, which pulled funds to fixed income investments as investors jumped on yield levels not seen since 2007. “When you can get 4% yield in the front end of the yield curve that’s an attractive alternative,” said Jack Ablin, chief investment officer at Cresset Capital. “The bond market had been competing for capital with both hands tied behind its back. Now it’s not.” Fed ahead In the week ahead, there are just a few data releases, but they will provide an important window into how the housing market has been coping with the Fed’s rate hiking cycle. August housing starts are Tuesday and existing home sales are Wednesday, and the data is expected to show slowing as mortgage rates rose. “The problem with that is it’s a ‘heads I win, tails you lose,'” said Art Hogan, chief investment strategist at National Securities. “Good economic data has been bad for the market, but we haven’t seen bad economic data be good for markets. Maybe we’ll flip the switch on that if you see enough of a drawdown in the housing data.” He said that would mean the Fed’s rate hikes are slowing the economy, as intended. Strategists say the most important information investors are looking for from the Federal Reserve will be what’s on the dot plot, the Fed’s so-called interest rate forecast. After the CPI release, the futures market for fed funds priced a big jump higher in the terminal rate, or end point where the Fed stops hiking. It had been pricing in a 4% terminal rate by April. “It’s now effectively an upper bound of 4.50%,” said Ben Jeffery, fixed income strategist at BMO. “The potential shock that we could see on Wednesday could be in the dot plot, not in the size of the rate hike.” The market is also pricing in a slight chance of a 100 basis point hike, but most economists expect a third 75 basis point increase instead. [A basis point equals 0.1%] Hogan said the stock market has been “freaking out over every tick higher in the 2-year yield,” which rose above 3.9% Friday. “The 2-year is really an expression of what we think the terminal rate is, and that’s why it’s moving up so aggressively,” he said. “All of that said, it’s really hard to be in a market place where good news on the economic data is bad and bad data is bad as well, and the only thing we can lean against is an improvement in readings on inflation. We fall into the category of it’s hard to find a positive catalyst in the near-term.” The next key inflation report is the PCE deflator, which is in the personal consumption expenditure data, due out Sept. 30. That inflation measure is closely watched by the Fed. The next CPI report is expected Oct. 13. Earnings and warnings There are also a handful of earnings in the week ahead, including General Mills and homebuilders KB Home and Lennar Wednesday, and Costco on Thursday. “If you look at earnings weekly upgrades versus downgrades, it’s kind of flat,” said Ablin. “Companies have an open ended invitation, every excuse in the book to reduce expectations. I think we will see earnings declines, but a lot of it is really foreign. The FedEx announcement was really about China and Europe.” General Electric also warned on Thursday that supply chain disruptions could impact its cash flow forecast. Ablin said he expects to hear more warnings from multinationals, particularly from companies with a lot of dollar exposure. Foreign sales are worth less as the dollar rises. “We still have a full weighting in small caps. That should benefit small caps and companies that do most of their business domestically,” he said. The dollar index has been trading at a 20-year high, and the euro was trading at par with the dollar Friday but has been slipping below $1. “What I’m really watching for is a rolling over of the dollar,” said Ablin. “Once investors sense light at the end of the tightening tunnel, we’ll see the dollar roll over and to me that’s an indication that it’s safe to get into the equity market, and we’ll see foreign stocks lead the way higher.” Technically speaking Strategists who follow charts have been monitoring the S & P 500 closely, to see if it breaks below 3,800. That level could open the door to a test of the June low, at 3,636. The last two weeks of September are about as bad as it gets for stocks. The month of September into early October is the worst period for the S & P 500. “This is the bad part of September. That’s the bad part,” said Hogan. “What’s the good news is that we’re in a mid-term election cycle so the last two months of the year are generally positive.” Week ahead calendar Monday Earnings: Autozone 10:00 a.m. NAHB survey Tuesday Earnings: Stitch Fix, Aurora Cannabis FOMC begins two-day meeting 8:30 a.m. Housing starts 8:30 a.m. Building permits Wednesday Earnings: Lennar, KB Homes, General Mills, Steelcase, Trip.com 10:00 a.m. Existing home sales 2:00 p.m. FOMC statement 2:30 p.m. Fed Chairman Jerome Powell briefing Thursday Earnings: Costco, Darden Restaurants, Accenture, FactSet, Manchester United 8:30 a.m. Initial claims 8:30 a.m. Current account Q2 10:00 a.m. Leading index Friday 9:45 a.m. Manufacturing PMI 9:45 a.m. Services PMI
