US stock markets are worried about the Fed. Should they be?

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What’s the single-best day on the economic calendar to own stocks?

It’s Fed day. No day has shown the kind of strong, consistent returns as the day of the Federal Reserve’s interest rate decision. Why is that? I think you can see it playing out today. The S&P 500 is down 50 points, or 1.0%, to 5066, the lowest of the week so far.

Today, WSJ Fedwatcher Nick Timiraos released his Fed preview and it suggested the FOMC would hold rates higher for longer, which isn’t really a surprise and a worry so long as no hikes are coming. But it also contained one caveat:

A hawkish pivot, suggesting an increase in rates is more likely than a cut, appears unlikely, for now. Any such shift is likely to unfold over a longer period. It would require some combination of a new, nasty supply shock such as a significant increase in commodity prices; signs that wage growth was reaccelerating; and evidence the public was anticipating higher inflation to continue well into the future.

Note the bolded and that today’s US employment cost index was at 1.2% q/q compared to 1.0% expected. Is that the re-acceleration? The market is certainly worried about it and stock futures fell 20 points moments after it was released.

It’s not all bad news though as today’s Chicago PMI and consumer confidence data suggested a softening outlook. In addition, some employment indicators have been flagging weakness and last week’s S&P Global US services PMI softened. Wage growth is a lagging indicator while those are leading indicators that suggest the toll of higher rates will eventually bite.

As for the Fed, I share the worry about a hawkish pivot but there have been no signs of it and with higher yields doing the Fed’s work right now, I don’t think it’s necessary. Powell is highly likely to continue to emphasize patience, flexibility and data dependence.

That should lead to the same sign of relief from equity markets that it usually does.