Some Market Hurdles and The FOMC Meeeting

While the Fed's FOMC Meeting on Tuesday and Wednesday should be the highlight this week, the stock market needs to get through two negative headlines -- the Chinese cancellation of trade talks with the US this week and an apparent White House memo regarding anti-trust investigations of social media companies.   In addition, the already announced tariffs on Chinese imports go into effect on Monday, but they should exert only a slight drag on US GDP growth (see my September 17 blog).

The negative headlines represent longer-term concerns for the markets, which could be put on the back burner for now.  The reported Chinese decision not to hold high-level trade talks with the US this week shows the issues will take a long time to get resolved.  At this point, both sides do not appear willing to compromise.  The White House memo regarding social media companies underscores the potential of government interference in the industry.  But, any anti-trust investigation is in the future, possibly becoming a more significant risk next year.

Stocks should take this week's FOMC Meeting in stride if not positively.   At the minimum, the Fed should retain its gradual approach to tightening (including a 25 BP hike at this meeting).  The Statement risks changing the description of monetary policy from saying “the stance of monetary policy remains accommodative,” based on the minutes from the August meeting.  Instead, it would indicate the funds rate is "moving closer to the range of estimates of its neutral level."  The markets could take it to mean the end of the tightening cycle is in sight, although the minutes of the July meeting indicate officials believe neutrality will be reached in 2019.

The Fed's Central Tendencies should show stronger GDP Growth.  A Central Tendency Range of 3.0-3.5% is reasonable, given the 3.2% H118 GDP pace and the Atlanta Fed model's 4.4% forecast for Q318.   It remains to be seen whether the Fed raises its projection of 2019 and 2020 Real GDP Growth, as well.

There are two important questions.  First, does the Fed still see Real GDP Growth converging to trend by 2020?   If so, the forecast would imply officials think the very strong growth of 2018-19 is temporary and their gradual approach to tightening will be enough to contain economic growth.  Second, did the Fed raise its estimate of trend from 1.8-2.0%.   (A higher estimate of trend productivity growth would be the most likely reason for their doing so.)  A boost in trend GDP Growth would be a significant positive for the stock market.  It would imply that strong GDP Growth does not have to be restrained as much as would be the case were trend in the 1.8-2.0% range -- a positive for the profits outlook.  

The Central Tendencies for the Unemployment Rate and inflation should be little changed.   Both the Total and Core PCE Deflator have risen an annualized 2.0-2.1% since December 2017.

                                           Fed's Central Tendency Forecasts
                                                  (Q4/Q4 percent change)
                                       2018            2019          2020            Trend
Real GDP  Growth       2.7-3.0         2.2-2.6      1.8-2.0          1.8-2.0
Unemployment Rate    3.6-3.7         3.4-3.5      3.4-3.7          4.3-4.6
PCE Deflator                2.0-2.1         2.0-2.2      2.1-2.2          2.0
Core PCE Deflator       1.9-2.0         2.0-2.2      2.1-2.2          na

Fed Chair Powell's post-meeting press conference may underscore the Fed's pro-growth focus.  He is said to admire Greenspan's restraint from tightening policy in the late 1990's based on his insight that the technological revolution with the internet would hold down inflation.   There was a lot of economic and social benefits at the time coming from the Unemployment Rate being allowed to fall to 3.8-4.0%.  And, Powell could reiterate the benefits in the current situation, with inflation under control.





  
 

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