The FOMC kicks off its first monetary policy meeting of the year this morning with a decision tomorrow, but with universal agreement that there will be no change in rates, what Chair Powell says in his 2:30 PM ET press conference will be the primary focus of investors around the world.  Some would have you believe that the prospects for the market this year rest entirely on Powell’s words, so that if he’s dovish, there’s hope for the bulls, but if he comes out as hawkish, all hope will be lost.

A hawkish tone by the Fed Chair would likely be seen as a negative short-term development for the market, but at the same time, the relationship is not as binary as many seem to believe. The chart below compares the performance of the S&P 500 to the market pricing for the probability of a rate cut at the March meeting (based on Fed Fund Futures) since last October.  While equities bottomed and started to rally in late October, it wasn’t until late November that the odds for a rate cut in March started to increase and move out of their range (red-shaded area).  By that time the S&P 500 was nearly 10% above its low and 3.5% above the high end of its October range.  From late November through late December, both the S&P 500 and the odds of a rate cut rose in unison with each other, but pricing for a March rate cut peaked on 12/22.  On that day, the S&P 500 closed at 4,754.63, and since then, the odds of a March cut have been cut in half to 44.6%.  Over that same period, the S&P 500 is up over 3.5%. If the Fed was driving the bus, how come the market hasn’t been going along for the ride lately?

Today’s data slate was light with the only release of note being the Dallas Fed’s monthly manufacturing survey. The results were disappointing to say the least as the headline number came in at -27.4, more than twice as low as expectations of -11.8.  The huge miss relative to forecasts is not exactly new though.  Earlier this month, the Kansas City survey and New York Fed survey likewise came in well below estimates.

Using data from our Economic Indicator Database, below we show the average spread between the actual release value and economist forecast of each regional Fed manufacturing survey (Empire, Philadelphia, Richmond, Kansas City, and Dallas) since 2011. As shown, this January has seen outright massive misses.  Only two other months have seen readings disappoint to wider degrees: December 2018 and March 2020. In tonight’s Closer we will provide an updated look at our Five Fed Manufacturing Composite which creates a composite of each of these reports to gauge national manufacturing activity.