The Fed remains the market’s sole preoccupation today as investors look for clues to the future course of monetary policy in the central bank’s official statement this afternoon.
The ‘considerable time’ debate has been dominating market participants’ discussion of the Fed. But at its core, this discussion is actually about handicapping the timing of the Fed’s first interest rate hike, which will be the next monetary policy move after the QE program comes to an end next month. Investors perceive ‘considerable time’ to mean about 6 months, though the Fed have never defined it in those terms, Janet Yellen’s off-hand response in one of her previous press interactions to that effect notwithstanding.
Not to get too hung up on just one phrase, but removal of ‘considerable time’ in today’s statement would signal to the markets that the countdown had started. This could also help Chairwoman Yellen come out with a consensus statement this afternoon, as removal of this phrase will ‘pacify’ the hawkish Philly Fed President Charles Plosser and the dissident Dallas Fed President Richard Fisher. The doves will likely point to the complete absence of pricing pressures, as this morning’s tame CPI shows, and continued labor market slack in the economy.
But they could presumably be ‘won over’ by reiteration of data dependency in the statement and the press event. We will see how the statement unfolds this afternoon, but the markets expect more clarity on the course of future Fed policy, and it will be unfortunate if the FOMC brings anything less than that.
[Hear: James Grant: Two Alternative Outcomes From Fed Policy – Much Higher Inflation or More Money Printing]
On the earnings front, the 2014 Q3 reporting cycle wouldn’t get fully underway for another three weeks, but the earnings announcements from companies with fiscal quarters ending in August have started coming in – these reports will form part of the Q3 tally. The Adobe Systems (ADBE) report after the close on Tuesday and this morning’s announcements from FedEx (FDX), Lennar (LEN) and General Mills (GIS) are all for the August quarter and will get counted as early Q3 reports. Relative to expectations, the Adobe and General Mills reports were on the weak side, while Lennar handily beat estimates and FedEx’s rate hike announcement on Tuesday likely overshadows its stronger-looking earnings report.
Overall estimates for Q3 have come down, in-line with the trend that has been in place for some time. Total earnings for the quarter are expected to be up +1.3% on +1.4% higher revenues; in Q2 we saw +8.1% earnings growth on +4.4% revenue growth. The current +1.3% earnings growth expected in Q3 is down from expectations of roughly +6% growth in early July.
