The Trump/Xi Jinping and FOMC Meetings -- Reasons to be Cautious?

There are enough uncertainties regarding the two main upcoming events -- the Trump/Xi Jinping meeting on November 29th and the FOMC Meeting on December 18-19 -- to be cautious about the stock market's near-term outlook.

The market should be helped  by growing optimism regarding a resolution of the US/China trade dispute as the November 29th meeting approaches -- unless comments out of Washington suggest otherwise.  However, after the meeting, this optimism may fade if the meeting just sets goals for an eventual agreement.  Stocks would be especially vulnerable if the second leg of tariffs looks like it will be imposed in January.

Since a 25 BP hike at the December FOMC meeting is highly likely, the question is whether the Fed will change its 2019 rate projection of 3 more hikes, cutting it to, say, 2.  This possibility was raised in comments by Fed Vice Chair Clarida and Atlanta Fed President Bostic that the neutral funds rate is close -- seeming to reverse the mid-October comment by Fed Chair Powell that the neutral rate is a long way off.  A cut in the Fed's projection of the funds rate in 2020, as well as in 2019 (without a change in the economic projections) would signal a lower neutral rate.  -- particularly if it puts the 2020 projection near or at the 2019 level.

It is not clear, however, what rationale Powell would offer if forward guidance changes from 3 hikes to 2.  And, the rationale could influence market reactions.  If he cites weak growth abroad having tilted economic risks to the downside, stocks might find it troubling that the Fed has shifted toward a bearish US economic outlook.  This rationale also would raise doubts about the wisdom of the Fed's decision to hike at the meeting.  The latter could be viewed as exacerbating the downside risks to the outlook.

Powell's more recent comment reminding the market that each FOMC meeting will be "live" next year -- as Powell will speak to reporters after each meeting -- fits with the Fed taking a more relaxed approach to tightening and could keep the markets in check.  Policy can change quickly if needed.  For example, if Fed officials think incoming economic data warrant more aggressive tightening, they do not have to wait until a quarter-end meeting to hike rates.  The markets would be more sensitive to US economic data and more restrained ahead of all the FOMC meetings than in the past couple of years.  This point would probably be made by Powell in his post-meeting press conference.