There’s likely going to be a hunt for direction this morning as investors await the Fed’s latest verdict on the economy and its thoughts on the future direction of interest rates.
That sounds like a pretty solid reason to hope for some sort of trade resolution, and not just with China. Remember, the U.S. also has trade issues with Europe, and Congress hasn’t approved last year’s revised trade agreement with Canada and Mexico. All this helps create uncertainty for companies likeOverseas, the Brexit situation remains a bit confusing. There were reports early today that Prime Minister Theresa May will ask for a three-month delay.
As we’ve also been saying, investors might want to listen this afternoon for any updates on the Fed’s balance sheet plans. Powell arguably walks a fine line on the balance sheet going into the meeting. A move by the Fed to announce the planned end its balance sheet unwinding, which it has hinted at, might be seen as positive from a market perspective but negative from an economic one.
Also, we’ll see if Powell says anything about where he and other Fed officials now see the so-called “neutral” short-term interest rate. That’s the level where the Fed would see rates not being too tight or too loose. In December, this level ranged between 2.5% and 3.5%, according to Fed officials. The Fed’s benchmark rate now is between 2.25% and 2.5%. If the neutral level comes down, The Wall Street Journal noted, that could imply that the Fed sees less need for future rate hikes.
Another area that could be worth watching for trade sentiment is semiconductors, which have been outpacing the overall market gains since the start of the year. These companies tend to have a higher than typical exposure to the China market. In some ways, one could argue that semiconductor companies have taken the lead so far this year and have helped provide momentum across other parts of the market, kind of the way the FAANGs did last year.
Speaking of Treasuries, yields remained pretty muted Tuesday as the Fed gathered. The 10-year yield was at around 2.6% early Wednesday, while the two-year was at 2.46%. That spread is sometimes watched, because a flat or an inverted curve—in which the longer-term Treasury yield falls below the shorter-term yield—has sometimes been associated with receptions. That spread fell to single-digits late last year, but has been pretty steady in the teens for weeks.
Economy stronger than ever, raise rates now!
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