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FOMC Preview

What’s in Today’s Report:

  • FOMC Meeting Preview
  • The S&P 500 Approaches Downside Target: Chart

Stock futures are modestly higher this morning as yesterday’s sharp declines are digested while bond yields pulled back from multi-year highs as focus remains on the Fed.

The 10s-2s spread inverted again overnight after GS and JPM changed their forecasts to reflect a 75 bp hike tomorrow which is in line with rate market expectations. This dynamic is a sharp change in expectations from just the end of last week and largely the reason for the carnage in equities yesterday.

Economic data was slightly better than feared overnight between the German ZEW Survey and the NFIB Small Business Optimism Index, but good data is being seen as hawkish in this aggressive policy environment.

Looking into today’s session, we will get another read on U.S. inflation via the PPI report (E: 0.8% m/m, 11.0% y/y) but the release is not likely to materially shift policy expectations at this point with the June FOMC Meeting getting underway this morning.

Bottom line, the latest declines in stocks have been due to a rapid repricing of Fed rate hike expectations, from 50 basis points as recently as last week to 75 basis points as of yesterday and whether stocks can stabilize here will likely depend on how the bond market (namely Fed Funds futures) trade today and through the conclusion of the Fed meeting tomorrow. New highs in yields and another yield curve inversion will weigh on stocks while stabilization in rates could lead to some degree of a relief rally.