Wednesday, March 21, 2018

Headlines Speak a Thousand Words -- And -- Look for 4 Fed Hikes This Year, Regardless of Today's Comments

More often than not, when a headline inspires me to click through to an article (typically they don't), I can glean all I need from the first few lines.

Here's a handful from this morning, and one from yesterday. There's a theme here:

: Revenue beat forecasts and the company said it saw an increase in sales growth...
General Mills: Beat earnings and revenue estimates, however lowered guidance citing "increasing cost pressure." 
FedEX: Easily beat earnings estimates, and "revenue also beat forecasts on the strength of higher prices." 
Steelcase: Handily beat earnings revenue estimates. The furniture maker said "its quarterly performance was better than it had anticipated, especially in the Americas and the Europe, Middle East and Africa regions. 
PPG Industries: Upgraded to a buy at Deutsche Bank. "Confident that PPG will fully offset raw materials with price increase in 2H18."
Theme: There's no recession on the near-term horizon, and -- as should be the case at this stage of the cycle -- inflation is picking up.

The Fed is more than justified in raising its policy rate a quarter-point today, while, per yesterday's post, we expect a generally soft tone on inflation in the statement and press conference.

In essence, on this we agree with economists surveyed by Bloomberg; there's enough inflation brewing to justify 4 hikes this year, but, per this week's message, the Fed's sensitivity to the equity market will likely have it promising only 3 for now:
Federal Reserve Chairman Jerome Powell and his colleagues will end up raising interest rates four times this year, but are unlikely to signal that intention at this week’s policy meeting, according to economists surveyed by Bloomberg. 
In a poll of 41 economists March 13-16, the median forecast predicted a quarter-point hike this week, plus similar moves in June and September and December. At the same time, respondents said policy makers will continue to pencil in three rate increases as being likely in 2018 in their updated quarterly forecasts.
The FOMC began meeting Tuesday and will issue a statement at 2 p.m. Wednesday announcing its decision and assessment of the economy, along with a fresh series of projections for its benchmark overnight policy rate, U.S. economic growth, unemployment and inflation. Powell will appear at his first news conference as chairman 30 minutes later. 
The results of the survey highlight the caution that economists believe policy makers will observe as they respond to a brightening economic picture driven by faster global growth, a pick-up in investment, and the impact of massive U.S. tax cuts and increased government spending. Officials are expected to acknowledge improvements in incoming data, but just hint at speeding up the pace of policy tightening.      
The economists surveyed are out ahead of investors. Pricing in federal funds futures contracts currently implies about a 35% probability of four increases or more in 2018, up from less than 10% three months ago. The probability of a rate increase this week is seen at about 100%.
"Given the strong economic numbers, it’s likely the Fed will issue some vague warning about future rate hikes being greater than expected,” Joel Naroff, president of Naroff Economic Advisors, said in his survey response.
Almost half of the economists surveyed said Fed officials will alter the language of their post-meeting statement, either to explicitly state that risks to their outlook had shifted to the upside, or more subtly to send the same message.
Still, an opposing half said they believe there will be no such change and the committee will continue to say the near-term outlook is "roughly balanced."
"Added federal spending and the tax cuts add to upside risks, but the potential for trade protections and weak retail sales to start the year present unexpected downside challenges," Scott Anderson, chief economist at Bank of the West.
Whether or not Fed policy makers acknowledge it, most economists believe the risks are rising for higher-than-expected growth and inflation. About three-fourths of respondents said those risks now pointed to the upside, up from 63 percent in December.

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