Wednesday's action in the stock market was all about the Fed. Well, right up until it wasn't, that is.

As expected, the FOMC (Federal Open Market Committee) left the target range for the Fed Funds Rate at 1.50% to 1.75% yesterday. To be clear, no one expected Jay Powell's gang to make any changes Wednesday. However, analysts were looking for changes to the Fed's statement that accompanied the rate announcement.

Although one does have to read the tea leaves in order to come to a conclusion, it does appear that Powell & Company see economic activity and inflation heating up more than previously thought. In the statement, the FOMC noted that on average, job growth and business investment both remain strong. For anyone who has been paying attention, this wasn't exactly news.

However, there were two changes to the statement that are worth noting. First, was the description of inflation expectations. Last month, the Fed projected that inflation would be moving toward the 2% target sometime this year. However, in yesterday's statement, the projection was moved up a bit to "in the coming months." This is obviously in reference to the recent PCE data, which hit the 2% level on a year-over-year increase.

Powell also introduced a new word to the statement in relation to inflation risks. While the FOMC has been concerned for quite some time that inflation was running too low (nobody wanted to see a Japan-style deflationary cycle), the statement now describes the risks (too low versus too high) of inflation as being "symmetric."

From my seat, this is a clear acknowledgement that (a) the Fed now needs to at least pay attention to the possibility of inflation running too hot and (b) Powell's group is planning on staying the course of 25 basis point rate hikes at every other meeting until a "neutral" condition is achieved.

In short, this suggests that if the economy continues on its current pace, we will see a total of 4 rate hikes in 2018.

Traders are also coming around to this point of view. According to the CME Group, the futures-based odds of 4 rate hikes this year are increasing steadily. At the beginning of the year, futures put the odds of 4 rate increases at just 11%. In March, that number had increased to 30%. And recently, the odds hit 51%.

Stocks initially rallied on the FOMC statement as there weren't any big surprises. However, it was all downhill from there into the close.

Once again, stocks slid by a significant margin during the afternoon trade. The culprit this time wasn't the Fed or earnings. No, it turns out that there were fresh trade headlines - and they weren't good.

Word hit that Trump was considering issuing an executive order restricting certain Chinese companies from selling telecom equipment in the U.S. Then there was talk of waning hope for any real progress in the U.S.-China trade talks. And that was all it took for traders to knock 30 points off the S&P 500.

So... With at least a couple more weeks of trade talks ahead and the Big Kahuna of economic data (the monthly Jobs Report) on tap for Friday morning, it is hard to see how this market would be able get out of the current funk anytime soon.

The good news is the bulls have managed to keep the major indices above important support during what looks to be a consolidation phase. The bad news is the bears are one or two negative headlines away from breaking to new lows. And the bottom line here is that if the indices break back below the prior lows, the sell algos are going to kick into overdrive and we could very well see a "whoosh" lower.

But for now, the models continue to suggest that this is a corrective phase within an ongoing bull market and we should play the game accordingly.

Thought For The Day:

Every saint has a past. Every sinner has a future. -Warren Buffett

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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