The Fed remains in the spotlight today, with the central bank expected to give investors a roadmap for the future course of monetary policy. There are plenty of other headlines as well, ranging from a continued oil price sell-off to weak European inflation readings, but the Fed will remain the key market mover with its statement and the Yellen presser in the afternoon.
It appears that ‘considerable time’ will lose its place in the post-meeting statement. The meaning of that to the markets will be that the Fed has enough confidence in the economy’s internals to no longer need a super-accommodative policy stance. Importantly, dropping the phrase would mean that the Fed will start raising rates in about 6 months’ time. Many expect the Fed to replace ‘considerable time’ with a new phrase, such as “they will remain ‘patient’ in raising rates.” The Chairwoman’s press conference will give us a good explanation of the changes they make to the statement.
The central bank is grappling with a volatile global backdrop, ranging from falling oil prices to tensions with Russia and economic weakness in Europe and China. We know that the FOMC sizes up the international environment while evaluating its monetary policy stance and they will do the same this time as well. Of particular interest will be the committee’s inflation and GDP growth forecasts in the wake of developments in the oil patch.
Falling oil prices a net positive for economic growth, but they are also disinflationary, which is something the Fed has to be mindful of. This morning’s soft CPI reading reconfirms that developments in the oil patch are having a bearing on the inflationary picture. This may not be a big issue in the U.S., but it’s definitely the primary issue across the pond.
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Unlike the Fed, inflation is the primary issue for the European Central Bank (ECB). Euro-Zone inflation readings today underscored the tough fight in front of the ECB, with the headline reading for November dropping to a +0.3% year over year gain, below October’s +0.4% increase, which itself was the lowest reading since the fall of 2009. Given the recent trajectory of oil prices, this trend will most likely get even more entrenched in the coming months as the year over year change in oil prices turns negative.
Markets expect the ECB to come out with an aggressive quantitative easing program to stem the deflationary spiral, though Germany doesn’t seem to be onboard with the central bank’s plans. Jens Weidman, the Bundesbank President, recently made light of the deflation risk facing the currency union. Hard to envision the ECB going for a full-fledged QE without the active support of Germany.
In corporate news, we got weak earnings reports from FedEx (FDX) and Joy Global (JOY), while General Mills (GIS) came out ahead. The FedEx is notably disappointing as the delivery firm would generally be a considered in the sweet spot of two unfolding trends – falling oil prices and growing shipping volumes as a result of increased online spending. FedEx came out ahead the last time around after many quarters of coming up short, raising hopes that they had finally resolved their operating issues. But apparently not.
