December FOMC Meeting: A Negative for Treasuries and Stocks?

Wednesday's FOMC Meeting risks being a negative for Treasuries and, to a lesser extent, stocks.  Although a 25 BP rate hike is fully expected, the risk is that the Fed will shift up its expectations for the funds rate in 2018 -- the "dots."  The median expectation for the funds rate could shift up to 4-5 hikes from 3. 

A shifting up of the dots would be in response to a higher central tendency for Real GDP Growth in 2018. The latter conceivably could move up to 2.5-2.8% from 2.0-2.3%, as these forecasts build in the boost from a tax cut and take account of better-than-expected underlying momentum in the economy.  The Central Tendency for the Unemployment Rate will likely be lowered, as well.  The inflation outlook should be unchanged, but if anything could be raised in response to the higher growth forecasts.  The stronger growth expectations should mitigate the impact of higher rate expectations on the stock market.  Stocks also could be helped by movements in the Congressional conference committee to eliminate some of the anti-growth elements of the Senate bill, such as the AMT.

                                        Fed's Central Tendencies From September FOMC Meeting
                                                        2017                2018
Real GDP                                       2.2-2.5             2.0-2.3                               
Unemployment Rate                      4.2-4.3             4.0-4.2
PCE Deflator                                 1.5-1.6              1.8-2.0
Core PCE Deflator                        1.5-1.6              1.8-2.0

The economy's strong momentum is showing up in several indicators.  Both Initial and Continuing Claims fell below the November average in the latest week (table below).  The ECRI Leading Index has moved up to new highs in the past 3 weeks (chart below).   And, the NY Fed model's very early projection for Q118 Real GDP Growth is 3.1% after a projection of 3.9% in Q417.   

                                       Unemployment Claims (level)
                                  Initial                             Continuing
Oct Avg                      232k                                1.893 Mn
Nov Avg                     242                                  1.913
Latest Week                236                                  1.908


ECRI Leading Index (level)