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Fortune has smiled on the stock market so far this week. The Dow Jones Industrial Average, S&P 500, and equal-weighted S&P 500 have all set new record highs. They have done so against a backdrop of uncertainty involving the Fed's interest rate decision, only that uncertainty isn't about whether the Fed will cut rates. Rather, it is about how much and how fast the Fed will cut rates.
According to the CME FedWatch Tool, the fed funds futures market continues to place a relatively high 63% probability on the prospect of a 50-basis points rate cut today.
It is a peculiar expectation with the stock market sitting near record highs and an Atlanta Fed GDPNow model that estimates real GDP growth will be 3.0% in the third quarter, yet it captures concerns about the fed funds rate being overly restrictive now, thereby risking a hard landing driven by the lag effect if the Fed doesn't get going on more sizable rate cuts now.
That is the concern in the market, but to be clear, it is not a concern shared unequivocally by the market. That's why the rate decision could provoke a good bit of trading volatility in its wake.
That decision will come at 2:00 p.m. ET. It will be accompanied by an updated Summary of Economic Projections (SEP), which will be scrutinized closely for the Fed's expected rate cut path, and followed by Fed Chair Powell's press conference at 2:30 p.m. ET to explain the decision.
What happens in the market today leading up to 2:00 p.m. ET, then, can be considered simply as tension on the wire. That tension won't be fully released until the rate decision, SEP, and Fed Chair Powell's comments have been digested.
In the meantime, the market is digesting a better than expected Housing Starts and Building Permits Report for August.
Housing starts increased 9.6% month-over-month to a seasonally adjusted annual rate of 1.356 million units (Briefing.com consensus 1.320 million), bolstered by a 15.8% increase in single-unit starts. Building permits increased 4.9% month-over-month to a seasonally adjusted annual rate of 1.475 million (Briefing.com consensus 1.415 million), aided by a 2.8% increase in single-unit permits.
The key takeaway from the report is that single-unit starts and permits were up in every region, reflecting increased activity among builders that has been facilitated by sliding interest rates and pent-up demand.
Treasuries didn't react much to the report, having experienced some modest but steady selling pressure in the overnight trade. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, is up four basis points to 3.63% (but down 62 basis points for the year), and the 10-yr note yield is up four basis points to 3.68% (but down 20 basis points for the year).
Currently, the S&P 500 futures are up eight points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 48 points and are trading 0.2% above fair value, and the Dow Jones industrial Average futures are up 54 points and are trading 0.1% above fair value.
Call it hopeful tension on the line.
