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Will the Fed Raise Rates in June? Outlook Uncertain

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Thursday, May 19, 2016

The major indexes are on track for a modestly negative open this morning, with Fed-centric uncertainty coming back to the fore following Wednesday’s minutes of the last FOMC meeting. Partly offsetting the Fed drag is the positive Wal-Mart (WMT - Free Report) earnings release this morning that follows disappointing results from a variety of retailers in recent days.  

Market participants were forced to recalibrate the odds of a June rate hike following the release of the minutes, which clearly indicated that the FOMC remained open to the idea provided the U.S. economy would continue to improve. Economic data has been trending down over the last two quarters and was barely in positive territory in Q1. But it has been showing signs of improvement in the current period, with retails sales, industrial production and even inflation showing renewed signs of life.

The labor market remains a big question mark at this stage, particularly following last month’s surprisingly soft reading. The next jobs report, due on June 3rd, will be key to establishing the market’s Fed expectations. This morning’s weekly Jobless Claims data shows some improvement from last week’s surprising spike, but still remain around the 270K level. The question now is whether the FOMC will be content with the next jobs reading coming in below the 200K level even though the tally could still be consistent with full employment and a stable unemployment rate.

A strong jobs report on June 3rd will effectively guarantee a rate hike at the mid-June FOMC meeting, though many see the Brexit vote as giving the Fed a pause at the June meeting even if economic data otherwise warranted it. I don’t expect the Fed giving the Brexit vote that much weight. But even folks on the Brexit bandwagon are pushing out the next rate hike only into July.

The Fed aside, the positive Wal-Mart earnings report this morning came as a welcome surprise after Wednesday’s Target (TGT - Free Report) miss and last week’s across-the-board department store weakness. We have been discussing the disappointing retail sector results in this space in recent days and have been hesitant to put the blame consumer spending trends. Today’s Wal-Mart report reconfirms that the problem lies with the underperforming retailers and not the consumer.

Sheraz Mian
Director of Research

Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.

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