Stock-market bulls brushed off an escalation in trade tensions and an awkward-at-best start to a summit meeting of world leaders in the past week. Next, they get to run a central-bank and geopolitical gauntlet as the Federal Reserve and the European Central Bank each prepare to hold crucial policy meetings.
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In the case of the Fed, members of the Federal Open Market Committee are seen as virtually certain to raise the fed-funds rate by a quarter of a percentage point, marking the second hike of 2018 when they conclude their two-day meeting on Wednesday. The ECB is expected on Thursday to at last outline its plan for eventually winding down its purchase of monthly bond buys—a process many economists expect to be completed by the end of the year.
So, which one will matter most?
“I think the Fed will be more important because of the kind of leadership we’re seeing from U.S. markets again…although the ECB could be more interesting just because it’s an important meeting in terms of signaling [the end of] their QE program,” said James Ragan, director of wealth management at Seattle-based D.A. Davidson, in a phone interview.
Dissecting the ‘dot plot’
While an increase in the fed-funds target to a range of 1.75% to 2% should be fully discounted, investors will have plenty to pore over, including the Fed’s policy statement; the updated projections on the future interest-rate path by individual policy makers, known as the “dot plot;” and Chairman Jerome Powell’s news conference.
“The key question for the markets is whether the dot plot still implies three hikes for this year or an upward shift to four hikes,” said Philip Marey, senior U.S. strategist at Rabobank, in a note.
A more aggressive forecast could spur fears the Fed will tighten too fast, potentially accelerating the onset of recession. But investors might be inclined to doubt the Fed.
Marey, who expects the Fed to end up delivering a total of three rate increases this year, said he wouldn’t change his call even if the dot plot sees an upward shift. “As long as the Phillips curve refuses to materialize, we continue to have our doubts about the Fed’s hiking plans,” he said, referring to the inverse relationship that says falling unemployment should spur a pickup in inflation.
Watch Treasurys
Ragan said stock-market investors will pay attention to the reaction in the bond market. While a rise in the 10-year Treasury yield TMUBMUSD10Y, +0.91%[2] toward 3.25% could eventually be in store as the Fed continues to tighten, rising rates shouldn’t present too much of a headwind for equities as long as economic growth is also seen picking up steam...