Market Setup Before the Fed
Stocks show some green this morning, driven by the technology sector. DRAM and memory names that fell earlier are catching a bid again. Higher beta plays are rising too; SpaceX is up over 4% and near the $150 level. About 60% of S&P 500 (SPX) stocks are advancing.
The FOMC decision comes later today. Yields are easing, with the 10-year down about 4 basis points from the 5% level. The dollar is stabilizing and crude oil is falling. A 25 basis point rate hike is baked in, so the commentary matters most.
A dovish hike - one that signals a pause to wait for data - would likely be a net positive for equities. A more aggressive signal, which looks questionable right now, would likely bring a pullback. A small group of traders, about 5 to 7%, think Warsh will break from Fed funds futures pricing and hold rates. If that happens, back-end yields in the 20s and 30s probably blow out to the upside, which would be the big volatility event of the day.
On the dollar: a hike could be positive for equities and positive for gold, but negative for the USD if the press conference turns dovish.
Retail Sales Come In Hot
Retail sales are not inflation adjusted. If prices rise and consumers buy the same volume, the numbers look better than the real activity. Core retail sales ran negative the last couple of months, so today's print is a bounce back to positive.
Only one category fell month-over-month: materials.
- Headline retail sales: +1.2% month-over-month, versus the 0.8% expected. Last month was revised up to -0.5% from -0.6%.
- Core retail sales: +1.4% month-over-month, versus 0.6% expected, with a positive revision.
- Control group (the piece that feeds directly into GDP): +1.4%, versus 0.4% expected.
The Atlanta Fed GDP Now forecast for the third quarter sits at 4.4% and should be revised higher because of that control group figure. Back-to-school spending and higher gas prices helped, both lifting purchases and distorting the data. This is a decent data set, and it does not help Fed members who want to pause.
Import Prices at a Four-Year High
Import prices are the warmest since 2022, a four-year high. This is not only an energy story. Gains are broad-based, with non-fuel goods led by capital goods, a record. Prices from China jumped sharply on the month; the US is buying more from China, seen in Chinese export data, with tariffs on top. Much of this buying is going to build out AI infrastructure. Transportation costs for imports and exports feed into the data too. Import and export prices have risen all year.
Inflation Not Yet Hitting the Consumer
Much of this inflation has not reached the consumer yet. JB Hunt (JBHT), a large freight trucking company, cut its guidance, especially top-line revenue, because diesel prices are eating into margins and starting to slow demand. The question is whether that spreads to other parts of the economy.
Why This Is Not 2022
The takeaway is a resilient consumer paired with stubborn price pressures. If the hawks wanted another inflation print, the import prices gave them one.
Comparing this hike cycle to 2022 misses the different dynamics. In 2022 the economy came off a very low base with very low interest rates. Now rates are already elevated, so how much higher the Fed can go is the big question.
March 2027 year-over-year comparisons should look favorable. The hikes over the next couple of months will likely be short-lived, with a reversal possible by March or April next year when the Fed can back off. The thinking is the Fed at least needs to remove the insurance cuts made over the last year.
Watch the press conference for language on the pacing of any tightening cycle. It is rare to see one and done, but some expect exactly that this afternoon.
