The Week Ahead – Birdland

Welcome to “The Week Ahead” where each Friday we take a moment to provide our thoughts on what we can expect in markets and the economy for the upcoming week.

Charlie “Bird” Parker – one of the icons of jazz music. New York city’s famous jazz club Birdland is named after him, and it is because of Charlie Parker I learned what ornithology is, the study of birds. In the world of investing, the most followed birds it seems are hawks and doves.

The highlight of this week was the much anticipated FOMC meeting. Surprisingly, the main attraction was the update to the Dot Plot. The dots revealed that the 11 members still expect 3 hikes this year, which implies a consensus for another hike at December’s FOMC meeting. The Fed is looking for 3 hikes in 2018 followed by 2 hikes in 2019. More importantly, the long-run equilibrium rate was decreased from 3.0% to 2.75%. As expected, October will see the start of the balance sheet normalization program coming in the form of a $6 billion reduction in Treasuries and a $4 billion reduction in agency MBS, for a total of $10 billion per month. Fed Chair Yellen emphasized that monetary policy remains the Fed’s active tool and that tapering would continue unless the economy significantly changed and the fed funds rate had been reduced close back to zero. In conclusion, near-term hawkish but long-term dovish.

This coming week, we’ll see the third estimate for second quarter GDP with expectations of little-to-no change. Additionally, Core PCE is expected to follow the footsteps of the Core CPI reading we saw last week, a slight uptick. With the Fed taking down their inflation forecast in the near term, this year to 1.5% from 1.7% and to 1.9% from 2.0% next year, market volatility tied to lower inflation readings should remain muted. The Fed is still looking for an improving trend with inflation as they expect Core PCE to come in at their long-term target of 2.0% in 2019.

One of Charlie Parker’s most famous pieces is “Confirmation”, which is now a bebop standard. Much like the title of the song, the Fed has already received confirmation that the U.S. economy is on stable ground and as inflation begins to be confirmed, expect interest rates to rise.

Data deck for September 23 – September 29: