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Mar 21, 2018

The Wall Street Journal | MoneyBeat: Why the Fed Shouldn’t Mess With the Dot Plot Yet.

The Wall Street Journal
MoneyBeat

Why the Fed Shouldn’t Mess With the Dot Plot Yet

By Chelsey Dulaney
Morning MoneyBeat is the Journal’s pre-market primer. To receive the newsletter via email, click here.
Market Snap at 03/21/2018 08:22:51 AM ET
S&P 500 Futures -0.1%
2720.75
DJIA Futures -0.1%
24739
U.S. 10 Year -3/32
2.908%
WSJ Dollar Index -0.25%
83.94
Crude Oil 1.09%
$64.23
Gold 0.24%
$1320.70
Europe
Asia
FTSE 100 -0.48%
Nikkei 225 -0.47%
DAX -0.05%
Hang Seng -0.43%
CAC 40 -0.27%
Shanghai -0.29%

Overnight Developments

  • Global markets wavered ahead of the Federal Reserve’s interest rate announcement expected later Wednesday. S&P 500 futures pointed to a 0.1% fall at the open.
  • The Stoxx Europe 600 was recently down by 0.3%.
  • Earlier, trading was muted in Asia, in part due to a Japanese public holiday.
  • The Breakfast Briefing

    Many investors believe the Federal Reserve will signal plans to pick up the pace of interest-rate increases when it wraps up its latest policy meeting Wednesday.
    Here’s one reason it shouldn’t: a recent surge in a key short-term borrowing rate has already been tightening financial conditions.
    The three-month U.S. dollar London interbank offered rate, or Libor, has recently surged to its highest level since 2008. That has occurred as the U.S. government steps up issuance of short-term bills, while changes to the way corporations’ overseas profits are taxed have encouraged them to reshuffle bond holdings.
    Libor is used to set lending rates on trillions of dollars worth of loans; the increase is boosting borrowing costs for many consumers and borrowers. That has roughly the same impact as the Fed hitting the brakes.
    Analysts at Bank of America Merrill Lynch estimated this week that the rise in Libor “has effectively tightened financial conditions by the equivalent of an additional rate hike.” This could conceivably lead the Fed to downplay chances for a faster pace of tightening this year.
    In December, the Fed's economic projections, called the "dot plot," showed officials expected to raise rates three times in 2018 and twice in 2019. The Fed is widely expected to deliver the first rate-increase of this year at the close of Wednesday's meeting.
    But some investors believe strong job growth and fiscal stimulus will encourage officials to boost their interest-rate forecasts for both this year and next.
    BMO Capital Markets strategists warned Tuesday that “moving 2018 dots higher is likely to tighten the market more quickly.” That could spook investors, weighing on riskier assets such as stocks and emerging-market debt while sending U.S. bond yields and the dollar higher.
    Among other factors for the Fed to consider: rising trade tensions and underwhelming U.S. inflation, housing and retail sales data, said Steven Englander, head of research and strategy at Rafiki Capital Management.
    “The case for four [increases] is far from certain and it will look erratic and be embarrassing if subsequent data force them to pull back,” he wrote in a research note. “There is no upside to having the market now price in a more hawkish outcome than subsequently emerges.”
    Should the Fed pick up the pace of rate-increases? Let the author know your thoughts at chelsey.dulaney@wsj.com.

    Key Events

    8:30 a.m.: Current Account for the Fourth Quarter [Prior: -$100.6 billion; Consensus: -$126.8 billion]
    The current account deficit is expected to have widened in the fourth quarter. The current account provides a broader look at trade flows by tracking investment and remittances in addition to the movements of goods and services across borders. The widening U.S. trade deficit has been a key focus of the Trump administration.
    10:00 a.m.: Existing Home Sales for February [Prior: 5.38 million; Consensus: 5.42 million]
    Sales of previously owned U.S. homes are expected to have risen in February after an unexpected decline in January. Recent readings have suggested that tight inventory, rising prices and higher mortgage rates have been deterring home buyers.
    10:30 a.m.: EIA Petroleum Status Report
    Data from the Department of Energy is expected to show U.S. crude-oil stocks rose in the week ended March 16. Estimates from 12 analysts and traders showed U.S. oil inventories are projected to have increased by an average 2.4 million barrels.
    2: 00 p.m.: Federal Reserve Decision
    The Fed is expected to lift its benchmark borrowing cost by a quarter-percentage point at the close of its two-day policy meeting. Investors are also watching for any changes to the Fed's projections for future rate-increases. Chairman Jerome Powell's press conference, scheduled for 2:30 p.m., will also be closely watched.

    Stocks to Watch

    MuleSoft—Up 5.7%: Salesforce is buying the cloud-applications builder in a deal valuing the firm at $6.5 billion, as Salesforce continues its efforts to expand service offerings beyond customer-relationship management software. MuleSoft closed up 27% Tuesday following a Reuters report that the firms were in advanced talks, then extended those gains in after-hours trading after the official deal announcement. Saleforce was down 2.5%.
    Celgene—Up 0.3%: Prothena said Celgene is investing and partnering with the biotechnology firm on treatments for neurodegenrative diseases.
    FedEx—Up 0.1%: The package-delivery company said revenue rose 10% in the most recent quarter, topping expectations, and boosted its guidance for the year to reflect tax benefits and improved performance.
    Time Warner—Flat: Forecasts of snow in the U.S. capital prompted a federal judge to push back to Thursday the opening arguments in the long-awaited antitrust trial of AT&T and Time Warner.

    Number of the Day

    $768 billion
    Amazon.com Inc.’s market value rose to $768 billion on Tuesday, surpassing that of Alphabet Inc. to become the second-largest U.S. company.

    Must Reads

    CEO Pay Hits Record Highs on Stock Market’s Surge: The chief executives of America’s biggest companies are on track for another banner year of compensation. Median pay for the chief executives of 133 of the largest U.S. companies reached an all-time high of $11.6 million in 2017.
    FTC Probing Facebook Over Data Use by Cambridge Analytica: The Federal Trade Commission is investigating Facebook over the use of personal data by an analytics firm tied to President Donald Trump’s campaign.
    Investors Haven’t Been This Worried About Trade Wars in a While: Thirty percent of fund managers around the world say a trade war poses the greatest risk to the markets, according to a Bank of America Merrill Lynch survey.
    Hot Cocoa: Chocolate Ingredient Soars—and Could Go Higher: Investors scrambling to cover short positions in cocoa have sent its price surging 30% this year, making the chocolate ingredient one of this year’s best-performing assets.
    Has the Cryptocoin Market Met Its Match in the SEC? Regulators looking into potentially widespread violations in cryptocurrency markets have taken a bite out of the once-soaring investor demand for token deals.
    Spotify to Make Less Than a Third of Company Available on First Day: When Spotify’s shares begin trading April 3, less than one-third of them will be available for sale, a move designed in part to prevent a deluge of shares from instantly hitting the market in the streaming service’s unusual IPO.