The decisions of the Federal Reserve will determine which way stocks and bonds move this week. Reaction to the Fed meeting is likely to be volatile with market participants split on their expectations. Aside from the closely watched equities markets, the 10-year Treasury bond has flat lined for three weeks as investors await the Fed’s next steps.
Long-term, diversified investors do not need to be overly concerned with Fed policy, including when rates are rising. Rate hikes usually signal the economy expanding outside of a situation such as the late 1970s and early 1980s, when the Fed hiked rates to kill inflation. Markets may be volatile in the short-run because the Fed has engaged in abnormal monetary policy for 7 years. A change to normal policy is a big shift, but over time the long-term trend reasserts itself, which in this case is still a bull market. For slightly more active investors who engage in sector rotation, a change in Fed policy may warrant some changes, but there will be time to act.
As to the decision itself, economic data, finance ministers, central bankers and the Fed’s own criteria all indicate interest rates should increase at this meeting. If the Fed puts the decision off, it could hike as early as October, followed by the December meeting. It’s worth noting the Fed was widely expected to begin tapering the third round of quantitative easing at the September 2013 meeting, but put that decision off until December that year. Speculators in the futures market have fully priced in a rate hike by the December meeting.
While the Fed will overshadow most financial news this week, there is important data being released over the coming days. In the United States, retail sales for August will be released. Industrial production, capacity utilization, CPI and housing starts will also be announced mid-week. Business inventories for July are out on Tuesday and that number could affect the Atlanta Fed’s GDP Now estimate for third quarter growth. It is currently forecasting growth at 1.5 percent.
Overseas, the Eurozone will also report its CPI for August over the coming days. Over the past weekend, China announced industrial production ticked higher, but fixed asset and real estate investment slumped. Money supply growth slowed as well, indicating a slowing economy.
Earnings season is over for the most part, though a significant report from FedEx (FDX) will be released. The company is seen as an economic bellwether because it is literally part of the economy’s circulatory system, moving goods around the globe. As soon as there is a pickup or slowdown in economic activity, the performance of FedEx is immediately impacted. Analysts are looking for approximately $2.45 in earnings per share and $12.30 billion in revenue. Transportation stocks have been weak in 2015 and FedEx is down about 14 percent, slightly worse than the Dow Transportation Index. Also reporting this week is Oracle (ORCL), a top holding in many technology funds.