The Fed should be very happy with how the markets dealt with lift-off, with stocks, bonds and currencies all seeing the move as a vote of confidence in the US economy’s outlook. Importantly, the central bank has been able to keep the markets onboard with its future plans. Interest rates will be going up in the coming months, with the Fed’s current projections indicating four rate hikes in 2016.
The next one is likely in March, provided the tone and tenor of economic data remains unchanged from what we have been seeing lately. But a lot will depend on how the labor market and inflation readings shape up in 2016.
The risk is that acceleration in wage and inflation will force the Fed’s hand in speeding up the tightening cycle. We have no evidence of that at present, which means there is no reason to doubt the Fed’s commitment to be ‘gradual’ in future rate increases.
Beyond the Fed, we have started seeing earnings reports from companies with fiscal quarters ending in November. The FedEx (FDX) report is a standout outperformer, with the package delivery firm clearly benefiting from the surge in online spending this holiday season. FedEx and UPS (UPS) had faced logistical challenges this time last year with many customers not getting their deliveries on time; they appear to have been better prepared this time around.
Oracle’s (ORCL) report after the close on Wednesday was mixed, with momentum in its cloud business offset by weakness in its legacy business. Nothing positive in the General Mills (GIS) report this morning, with the cereal maker missing top- and bottom-line estimates and guiding lower.
Earnings aren’t in the spotlight at present; we will have to wait three more weeks for the Q4 reporting cycle to really get going in the New Year. But we know that earnings have been weak in recent quarters and no one is looking for great things from the coming earnings season either. The strong dollar, energy sector weakness and global growth worries have been weighing on the earnings picture lately and this trend is expected to persist at least through the first half of the year.
With the Fed question out of the way, the path appears clear for stocks to build on the positive momentum of the last few sessions. But volumes will start to thin out in the coming days, which has the potential to exaggerate market moves in either direction.