Thursday, March 20, 2014
The stock market today will reflect more follow-through from the Fed announcement. Pre-open sentiment is modestly in the negative, but we will see if the traders’ response today will be different from their immediate reaction yesterday. The Fed didn’t really move the goal post much, but the overall perception in the market is that the incremental change is in a more hawkish direction.
The official post-meeting statement committed to keeping interest rates low for a ‘considerable period’ after the QE program had ended. But the Chairwoman’s definition of ‘considerable period’ is no longer than six months. What this means is that if the QE program concludes by the end of this year as currently envisaged, then interest rate increases could start sometime in mid-2015. This isn’t materially different from consensus expectations ahead of the Fed announcement, but it is just a tad bit shorter timeline.
In addition to the Chairwoman’s six-month comment, the committee’s economic projections were also a bit disconcerting, particularly relative to their December projections. They now see a modestly lower path for GDP growth, expect the unemployment rate to drop more, see inflation rising a bit faster and, importantly, see a quicker start to rate increases.
These projections seem to indicate that in the structural vs. cyclical debate about nature of slack in the economy, the FOMC has started leaning towards the former; meaning that labor market slack could diminish and pricing pressures start showing up even at a lower growth pace.
On the earnings front, we got better-than-expected results from Lennar (LEN) this morning, which follows strong results from fellow homebuilder KB Homes (KBH) on Wednesday. ConAgra (CAG) also came with an EPS beat on in-line revenues this morning, while Nike (NKE) reports after the close today.
Sheraz Mian
Director of Research
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