Stock index futures are choppy Wednesday with the Fed rate decision coming this afternoon.
Markets are pricing an 80%+ chance of the FOMC boosting the fed funds rate by 75 basis points and less than 20% for 100 bps. There will also be an updated for the Summary of Economic Projections, including the lookahead dot plot.
S&P futures (SPX) are +0.3%, Dow futures (INDU) +0.3% and Nasdaq 100 futures (NDX:IND) are +0.1%.
The S&P 500 just managed to hold the important 3,850 level yesterday.
The S&P has been up on nearly every Fed Day this year, with only a small drop in January as the exception, according to Bloomberg. The index rose more than 2% in March, May and July and was up 1.5% in June when hikes went up to 75 bps. Mott Capital argues that implied volatility indicates the S&P may rally regardless of what the Fed says.
Rates are slightly lower after a big run higher that took yields to levels not seen in years. The 10-year Treasury yield (US10Y) is down 3 basis points 3.54% and the 2-year yield (US2Y) is down 2 basis points to 3.95% after failing to breach 4% yesterday.
Fed expectations are “quite the turnaround since the last meeting in July, when markets initially latched on to a dovish interpretation,” but while markets shouldn’t completely rule out 100 bps, “the absence of ‘well informed’ journalist articles (a proxy for Fed communication) preparing the ground for 100bps speaks volumes,” Deutsche Bank’s Jim Reid said.
When it comes to projections, a “peak SEP unemployment rate that is less than 4.5% (even if up from 3.9% in June) would be seen as timid, in our view, as would keeping most of the modest growth recession (GDP growth of 1.7% in 2023 and 1.9% in 2024) seen in the June projections,” Standard Chartered’s Steve Englander wrote. “We see a risk of spooking investors with a dire forecast, and having the forecast be viewed as irrelevant if too timid.”
“In the short term, an overly optimistic forecast would probably be seen as dovish and lead to an asset-market rally, but if seen as revealing reluctance to do what it takes, could backfire.”
Among indicators, August existing home sales arrive shortly after the start of trading, following some strength in starts yesterday. Economists expect a dip in the annual rate to 4.7M.
In commodities, oil is moving higher as Vladimir Putin ordered a “partial mobilization.”