The markets struggled again last week as continued global economic slowdown fears and trade worries kept investors on their toes.
Next week is gearing up to be a busy week with events that have potential to move the market.
The Federal Reserve will be holding its highly-anticipated Federal Open Market Committee (FOMC) meeting Tuesday, December 18 to Wednesday, December 19. Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 p.m. ET on Wednesday. Consensus among economists remains that the Fed will raise interest rates; however, the real focus of this meeting will be on the Fed’s language about the central bank’s plan for the future.
“The more important question will be what signal the Committee sends about its policy path in the coming years. Overall, we expect the message to be that the Fed remains upbeat on the outlook and expects to raise rates further in the coming quarters,” Deutsche Bank wrote in a note on Friday.
TD Securities predicts that Powell’s speech will attempt to soothe investors amid the market volatility. “In his press conference we expect Chair Powell to continue to sound cautiously optimistic on the outlook and to try to calm market concerns about over-tightening.”
Furthermore, the government shutdown deadline is Friday, December 21. If lawmakers and the White House cannot reach an agreement on spending bills, the federal government will shutdown. The president has been trying to push for $5 billion in funding for his border wall, but Democrats aren’t willing to give more than $1 billion. Capital Economics believes that the federal shutdown could cause a plethora of issues in 2019. “We think the biggest downside risk next year is the possibility of a lengthy Federal shutdown that could eventually develop into another debt ceiling crisis,” Paul Ashworth, Chief U.S. Economist at Capital Economics, said in a note.
Quadruple witching will also take place on Friday, December 21. This is a phenomenon that occurs only four times a year in March, June, September and December on the third Friday of those months. Quadruple witching is when market index futures, market index options, stock options and stock futures expire on the same day.
In addition to the FOMC meeting next week, key economic data will be released. Housing data is expected on Tuesday and Wednesday, and GDP for Q3 will be released on Friday. The following is the most significant economic data for the week:
Monday: Empire Manufacturing, December (20.0 expected, 23.3 prior); NAHB Housing Market Index, December (61 expected, 60 prior); Total Net TIC Flows, October (-$29.1 billion prior); Net Long-term TIC Flows, October ($30.8 billion prior)
Tuesday: Housing Starts, November (1.230 million expected, 1.228 million prior); Housing Starts month-on-month, November (+0.2% expected, +1.5% prior); Building Permits, November (1.265 million expected, 1.265 million prior); Building Permits month-on-month, November (0.0% expected, -0.4% prior)
Wednesday: MBA Mortgage Applications, week ending December 14 (+1.6% prior); Current Account Balance, Q3 (-$124.5 billion expected, -$101.5 billion prior); Existing Home Sales, November (5.20 million expected, 5.22 million prior); Existing Home Sales month-on-month, November (-0.4% expected, +1.4% prior); FOMC Rate Decision (2.50% expected, 2.25% prior)
Thursday: Philadelphia Fed Business Outlook, December (15.5 expected, 12.9 prior); Initial Jobless Claims, week ending December 15 (219,000 expected, 206,000 prior); Continuing Claims, week ending December 8 (1.668 million expected, 1.661 prior); Bloomberg Consumer Comfort, week ending December 16 (59.4 prior); Leading Index, November (0.0% expected, +0.1% prior)
Friday: GDP Price Index, Q3 (1.7% expected, 1.7% prior); Core PCE quarter-on-quarter, Q3 (1.5% expected, 1.5% prior); Durable Goods Orders, November (+1.8% expected, -4.3% prior); Durables ex transportation, November (+0.3% expected, +0.2% prior); Personal Income, November (+0.3% expected, +0.5% prior); Personal Spending, November (+0.3% expected, +0.6% prior); University of Michigan Sentiment, December (97.5 expected, 97.5 prior)
Earnings activity will also pick up next week. Tech giant Oracle (ORCL) reports Monday, FedEx (FDX) and Micron (MU) report on Tuesday, and retail giant Nike (NKE) reports on Thursday. The earnings calendar is as follows:
Monday: Oracle and Red Hat (RHT) after market close
Tuesday: Darden Restaurants (DRI) before the bell; FedEx and Micron after the bell
Friday: CarMax (KMX) before the bell
And now, here’s what caught markets correspondent Myles Udland’s eye...
Risk credibility? The Fed can do whatever it wants next week
Next Wednesday, December 19, the Federal Reserve will announce its final monetary policy decision of the year. Most economists and market watchers expect the central bank will raise the target range for its benchmark interest rate by 25 basis points, its fourth rate increase of the year.
Some economists, however, think that recent disappointing economic data give the Fed a solid case against raising rates next week.
“The consensus overwhelmingly expects a rate hike next week,” said Neil Dutta, an economist at Renaissance Macro in a note earlier this week. “Looking at the Bloomberg News economics consensus, just three of the 60 economists surveyed, just 5%, expect the Fed to hold this month... This conviction feels a bit too strong for our liking.”
Dutta notes that in addition to a November jobs report that doesn’t show an overheating labor market, inflation data have been tame, global growth is slowing, and financial conditions have tightened.
The November jobs report released earlier this month showed the economy added 155,000 new jobs while the unemployment rate held at 3.7%. And though wages grew at a post-crisis high of 3.1%, the labor market’s strength in terms of total hiring continues to show few signs of overheating.
Inflation data out earlier this week also showed that overall cost pressures remain muted with prices rising in-line with the Fed’s goal but not accelerating.
“We see no urgency to hike at the moment,” Dutta added.
But with President Donald Trump having repeatedly attacked the Fed’s policy decisions — most recently saying the Fed would be “foolish” to raise interest rates next week — some think the Fed risks its credibility by altering their forecasted course for rate hikes amid the president’s barbs.
Greg Valliere, chief investment strategist at Horizon Investments, said in an email Thursday that “there are plenty of reasons, we think, for the Fed to skip a rate hike next Wednesday — except for one factor.” That factor is Donald Trump.
“Failure to raise rates [next Wednesday] would be a mild surprise and would lead to inevitable speculation that the central bankers bowed to intense criticism from Donald Trump,” Valliere added. “We don't think Chairman Jay Powell pays much attention to the president, but cynics in the bond market and elsewhere would howl that a stand-pat Fed has become politicized.”
Dutta, however, does not think a Fed pause would harm its credibility and signal to investors that politics are meaningfully influencing its policy decisions.
“Hiking simply because they’ve ‘said they would for a long time’ does not strike us as consistent with data dependence,” Dutta writes. “Credibility is established as the Fed shows a willingness to change its views as conditions in the economy and markets evolve.”
We are most sympathetic to Dutta’s view of the Fed’s credibility.
Saying that the Fed can or cannot make a policy decision based on whether the president is likely to approve of that decision creates a circular logic wherein neither decision allows the Fed to be independent.
Raise rates to actively ignore Trump, and the Fed is political; pause rate hikes to appease Trump, the Fed is also political. This line of thinking simply reveals whatever it is someone wants it to say about Fed policy, rendering the argument meaningless.
The Fed’s political independence is also less about how it sets monetary policy than it is about how it interprets the data that inform that policy.
The Fed’s credibility and independence does not hinge on how it responds to the president because it does not have to respond to the president. That is Larry Kudlow’s job. Because unlike Kudlow— who has argued the federal budget deficit is decreasing even though it is not and insists growth will overcome debt increases — the Fed does not have to spin economic data points to fit a preconceived view of any administration’s economic policies.
And it is because of what the incoming data have told the Fed about the economy since its September meeting that the case for not moving next week is being made.
Now, the market is still telling you the Fed is going to move next week.
According to data from the CME Group, there is a roughly 80% chance the Fed will raise rates next week. Which as far as market pricing is concerned means next week is a done deal.
The Fed’s dot plot forecast of rate hikes next year is likely to be the main event. In September, this forecast indicated the FOMC was split between calling for two or three rate hikes in 2019. A downward shift in the dots would likely be the market mover next week if indeed the path of rate hikes is pared down.
As we shift into this new phase for the Fed — a phase where fewer rate increases are being called for by the Fed’s forecast and the end of this rate-hiking cycle comes into view — there will be increasing noise about whether Trump is meddling in the Fed’s affairs. But as is the case with almost all discussions about the president, what you think is going on says more about you than it does about whatever is happening.
So those who intend to argue in the year ahead that the Fed is being pushed around by Trump, or that the Fed is pushing back against Trump, were inclined to think that anyway. And thus miss the mark when it comes to understanding what the Fed is doing and why.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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