Quarter end, manufacturing and the Fed dominate this week’s trading

This week’s economic calendar will be dominated by the FOMC meeting announcement, forecasts, and press conference on Wednesday. Nearly unanimously, strategists are expecting the FOMC to raise rates by .25 bps again – the eighth rate increase since December 2015. Investors will also be paying a great deal of attention to the Fed’s forecasts and commentary.

As recent employment reports have illustrated, the US economy has registered both consistent employment growth and rising wages. The August Employment Report is a good case in point. Non-farm payrolls in the period rose 201K. The unemployment rate remained a healthy 3.9%, and average hourly earnings on a year-over-year basis ticked up to 2.9%.

Additionally, the momentum of our resurgent economic expansion appears to be gaining steam. Using the monthly GDP report as a metric for that growth, Q2 GDP was raised to 4.2% on July 29, from an initial reading of 4.1%. The Atlanta Fed’s running quantitative economic model, GDPNow, currently stands at 4.4% – suggesting that the rate of GDP growth has ticked higher in recent weeks.

With strengthening economic growth as a tailwind, will the Fed raise its forecasts? If it does, will it also shift its monetary policy narrative/guidance to suggest a more hawkish tone moving forward? And if so, to what degree?

Financial Stress in the system has seen a marked decline since the Fed began tightening in 2015 – tightening that can best be described as proactive, consistent, and measured. Effectively, the Fed has been cautious in tightening and has in effect not raised rates above neutral.

I expect the Fed to raise by .25 bps this week. I also expect the commentary issued by the Fed and the speech given by Chair Powell to reflect a need for additional tightening with an eye on both inflation and wages – neither one of which at the moment speaks to anything but in-channel expansion and growth.

What could trigger an acceleration in inflation and a shift towards more hawkish guidance? Tariffs or a sharp rise in energy prices. Given the fact that the trade war between the United States and China shows no sign of abating, that variable could well be a factor in the Fed’s outlook as framed by Chair Powell.

On Thursday we receive the final Q2 GDP figure. As we have discussed, the prior reading was revised to 4.2% from 4.1%. Econoday consensus is calling for another revision higher to 4.3% in the final reading, while the GDP price index and real consumer spending Q/Q – SAAR are expected to remain unchanged at 3.0% and 3.8% respectively. Also on Thursday, Durable Goods Orders for August are due out. Econoday consensus is 2.0% versus July’s -1.7%.

Several quarterly corporate results to keep on eye on this week include Nike (NKE), CarMax (KMX), Accenture PLC (ACN), and ConAgra Brands (CAG).

This week is the last trading week of September and Q3. As a result, expect to see some portfolio window dressing – effectively adding additional modest lift for US equity prices. Volume, on the other hand, is likely to fade into week’s end.

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Flickr photo: BC Gov Photo