Wall St lower as earnings roll in; Fed meet eyed

“But we would be surprised if the inherently dovish Fed were to cause the market to notably ramp up its rate hike expectations, and hence provide a significant boost to the U.S. dollar”.

SAN FRANCISCO The U.S. Federal Reserve is expected to keep interest rates unchanged this week, deferring any possible increase until September or December, as policymakers hold out for more evidence of a pickup in inflation. Atlanta Fed President Dennis Lockhart said in mid-July that markets have been “quite orderly” and “the financial market turbulence we’ve seen does not seem to have caused direct harm to the country’s economy”.

Following the Brexit vote, traders in the Fed-funds futures market, which is used to place bets on the future course of Fed policy, priced in a higher chance that the Fed would cut rates in the coming months, rather than hike them.

A few months ago, it was widely assumed that the Fed would have resumed raising rates by now. After the United Kingdom referendum rate hike probability for this year simply disappeared and some FOMC policymakers indicated that they will be in no hurry to hike rates.

As a matter of fact, this will more than likely be the case as the EUR/USD exchange rate improved almost a quarter of a percent last week.

With the U.S. economy moving along steadily but not showing any signs of overheating, it has meant the Fed has not had to make any changes to the rate up or down to manage the domestic situation. But as the central bank meets the week of July 25, a resurgent US economy and job market have led many to predict a Fed move by December if not sooner. “If – and it’s a big if – the Fed raises their overnight rate in 2016, it will be at December’s meeting”. With no press conference scheduled after the meeting and no new economic forecasts to be released, the Fed’s policy statement will be scrutinized for any clues to whether a September rate increase is in play. Indicators such as the June job report, retail sales, housing starts and a gauge of service industries have all beat economists’ expectations.

The S&P 500 posted 32 new 52-week highs and no new lows; the Nasdaq Composite recorded 92 new highs and 19 new lows.

Ryan Sweet, director at Moody’s Analytics, also pointed to Brexit and said the Fed wants solid evidence that risks of a spillover effect on the USA economy from the event are small. In the spring, consumers boosted spending at the fastest pace in a decade. Markets are giving just 20% odds of a September move, but Gapen predicts it’s likely if payroll reports for July and August are both strong.

“As a result, [market] interest rates, including mortgage rates, will slowly increase between now and the end of the year”, Huettner adds.

“The Fed is hedging its bets because it doesn’t have lots of ammunition if things go wrong”, Swonk said.