All eyes will be on the Federal Reserve this week. The biggest policy shift since the announcement of the taper in May 2013 could be coming this Wednesday, when it is widely expected to remove the word “patient” and signal the coming of the first interest rate hike. The Fed will undoubtedly stress that a decision to hike interest rates is “data dependent,” which allows them to not hike rates as long as economic data remains unfavorable. GDP growth for the first quarter is trending on the weak side, with current estimates pointing to 0.6 percent growth based on data from January and February. On the other side is inflation, which appears to be roaring back after the drop in oil prices. The Billion Price Project at MIT is currently reporting inflation running at its highest since April 2014. Some of this is due to favorable comparisons over the prior month, but if oil prices recover, the inflation hawks at the Fed will push for earlier rate hikes.
Other economic data will be in the Fed’s shadow. Housing starts and building permits for February are out on Tuesday, while Thursday brings us the leading economic indicators for February. Today, industrial production and capacity utilization were reported; both came in slightly below expectations. Industrial production was up 0.1 percent in February, below expected growth of 0.3 percent. Capacity utilization fell to 78.9 percent, below expectations of 79.6 percent. These misses are not a surprise given the trend in data thus far in 2015.
There aren’t a lot of companies reporting earnings now that first quarter season has ended. However, the few reports will be important. Oracle (ORCL), a holding in many technology funds, reports earnings on Tuesday. The biggest report will be FedEx (FDX) because its earnings are closely tied to overall business activity.
The major stock indexes will be looking to bounce back from losses over the past two weeks. The S&P 500 Index is more than 4 percent below its high for the year, while the Nasdaq is about 3 percent below its high. The Russell 2000 Index remains the brightest of the bunch, and could climb to new all-time highs if stocks regain some momentum. Small- and mid-caps have been outperforming large-caps this year, partially due to the strong dollar weighing on multinational earnings. These smaller firms also lagged the broader market last year, setting them up for outperformance.
Key levels to watch this week include $1.05 for the euro and $43.00 for West Texas Intermediate Crude. A break of those lows could set off further selling in these assets.