FOMC Preview
Here at the Options Edge, we are predicting that the FOMC will deliver a third 75bp rate hike at its September meeting, resulting in a funds rate of 3-3.25%. We are further expecting 50bp hikes in November and December, which would take the funds rate to 4-4.25% by the end of the year. Inflationary pressure on services is expected to remain high, but the Federal Open Market Committee (FOMC) is anticipated to slow the pace of interest rate hikes. This slowing will be due in part to the fact that the fed funds rate will already be at a relatively high level, concerns about further tightening monetary policy and leading to an economic downturn, as well as falling consumer inflation expectations.
The FOMC’s new economic projections will probably indicate that GDP growth will fall noticeably below potential this year and next, a slightly higher rise in the unemployment rate in coming years, and somewhat more inflation this year and next. Our forecast is that the median dot will display a 4-4.25% fund rate by the end of 2022, an additional hike up to 4.25-4.5% in 2023, one cut in 2024, and two cuts in 2025; however, the longer run rate will remain at 2.5%.
Chair Jerome Powell will give opening remarks at a Fed Listens event in Washington on how the pandemic has reshaped the economy. Vice Chair Lael Brainard and Governor Michelle Bowman moderate conversations with community and business leaders to get their perspectives. On September 7th, Vice Chair Brainard said, while “it will take several months of low monthly inflation readings to be confident that inflation is heading back down to 2 percent,” nevertheless “a variety of indicators are showing signs of improvement on delivery times and supplies of certain items,” and labor force participation “showed a favorable rise” in August. Markdowns can also help to alleviate pricing pressure. On August 6th, Governor Bowman noted that “similarly-sized increases” in the federal funds rate to the FOMC’s 75bp hikes in June and July “should be on the table until we see inflation declining in a consistent, meaningful, and lasting way.”
The Hot Zones this Week
There are times each week when trading may get out of control. These I refer to as the hot zones.
This week’s events will be studied by investors, who will ask themselves what the FED will do on Wednesday based on two sets of data points. On Wednesday, the Federal Open Market Committee will release its rate decision. Investors will also be looking at housing starts and permits to help gauge the level of inflation.
Investors will be looking at two key sets of data this week as they try to gauge what the Federal Reserve may do at its meeting on Wednesday.
The first is housing starts and permits data for August, which will give some insight into inflationary pressures in the economy. The second is the FOMC rate decision itself, which will be closely watched for any clues about the Fed’s future plans.
As always, economic data releases can cause volatility in the markets, so investors should be prepared for some turbulence this week.
Global Spotlight
Israel takes the next steps in its quest to exploit a contentious gas field with Lebanon. Following heated debate from Hezbollah about the project, Israel’s Energy Ministry announced on September 16 that it will conduct testing and prepare to connect Karish to the national grid in the coming days. Hezbollah’s position in the field, on the other hand, is far less advantageous. As a result of Lebanon’s economic difficulties, Hezbollah is under pressure at least notionally to support a conceivable maritime agreement with Israel that might generate revenue or energy sharing between the two states and help alleviate Lebanon’s financial strain. Hezbollah might use drones or rockets to harass the field in order to extract further concessions from Israel, as well as to enhance its image of resistance to Israeli gas prospecting in Lebanese territorial waters.
Queen Elizabeth’s state funeral. The state funeral of Queen Elizabeth II will take place in London, with hundreds of foreign leaders in attendance, including US President Joe Biden, French President Emmanuel Macron, Turkish President Recep Tayyip Erdogan, European Commission President Ursula VON der LEYEN and Japanese Emperor Naruhito. British security forces are expecting hundreds of thousands of people to travel to London for the event, which will cause massive disruptions in movement throughout the city. The funeral, which will conclude a chain of events initiated by Elizabeth’s Sept. 8 death, will also provide numerous international and political contact between world leaders.
Following the deadliest civil unrest in Armenia since 2020, Pelosi travels to Yerevan. In a show of support for Armenia and its president following border confrontations between Armenia and Azerbaijan that left more than 170 people dead, U.S. House Speaker Nancy Pelosi will travel to Armenia on Sept. 17-18 as part of a trip to Europe. Pelosi will meet with embattled Prime Minister Nikol Pashinyan on a visit where she is expected to champion democracy and human rights, which has been done in a similar fashion during her recent visit to Taiwan. Pelosi’s use of the phrase “democracy versus autocracy” to characterize Armenia’s conflict with Azerbaijan might lead to a greater number of congressional demands for ending security assistance to Azerbaijan, as well as hardened views in Azerbaijan that the United States supports Armenian claims in peace negotiations.
A team of Russian business leaders visits Iran. Vladimir Putin, the president of Russia, said that a delegation of 80 leading representatives from Russian businesses would arrive in Iran next week to enhance commercial cooperation between the two nations. The two countries hope to improve economic cooperation on the trip in order to nullify U.S. sanctions, of which Iran and Russia are often impacted the most. The journey is one more indication of deepening ties between both nations, coming soon after Iran’s decision to provide Russia with attack drones for its war against Ukraine.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Earnings
Aggregate Estimates and Revisions
- 22Q2 Y/Y earnings are expected to be 8.5%. Excluding the energy sector, the Y/Y earnings estimate is -2.1%.
- Of the 498 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.5% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
- During the week of Sep. 19, nine S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
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