What Is The Fed Thinking?

March 27, 2023

Every Monday I write about the various reports that I think can move the markets each week. Today, I want to look at why I think those reports are worth following each week. It comes down to what the Fed is thinking and projecting for the future.

Let’s start off with the Gross Domestic Product (GDP). Here, we see that the Fed is expecting a sub-1% change in real GDP in 2023. If that is the case, companies will need to shore up expenses in order to create value.

That brings us to the next thing the Fed is thinking.  Unemployment is projected to jump higher than 4% in 2023.  That would make sense if GDP is flat and companies cut costs, but so far we haven’t seen unemployment head higher.

Ok, next – let’s look at how can the Fed accomplish its goals.  The hope is that the Core Personal Consumption Expenditures lowers from current levels.  You can see in the chart below that the Fed isn’t expecting Core PCE to hit 3% by the end of 2023. 

That brings us to the Core PCE report coming out this Friday. The report for Core PCE is expected to stay flat at 4.7% year over year. That is going to be problematic if the Fed is trying to see roughly 3.5% by the end of this year. Something will need to drop and fast.

That brings us to the last chart of what the Fed is thinking. Most anticipate the Fed Funds Rate to be 5.0 – 5.25%, which would give us one more 0.25 basis point hike for the year.

So the question is what will happen if unemployment doesn’t tick higher? What if Core PCE doesn’t start coming down? Do you think the Fed is likely to back off its mantra of “higher for longer” and start cutting interest rates later this year? Not likely.

I don’t know that the Fed will increase rates by more than 0.25%, but I get a little worried when everyone starts anticipating rate decreases because of the banking crisis. The Fed has laid out a plan of what they are thinking and anticipating, but rate cuts aren’t listed – not yet.

Acuity Brands (AYI) is my pick of the day. Here’s the weekly chart. This upward channel has been in place since mid-2022 and we’re now at the bottom of the channel with the potential to head higher from here. On a weekly basis we have a series of higher highs and higher lows.

AYI stock is back at deeply oversold readings on a technical basis with the 9-day RSI below 30, MACD deeply negative, and shares trading at a massive discount to the 50-day moving average.

I also look for companies with a track record of growing earnings-per-share and revenue and AYI fits the bill. Ok, I’m giving them a pass during the 2020 Covid pandemic. They’ve been on the right track ever since.

It’s not a stock that carries a lot of open interest in the option strike prices, but that doesn’t mean you can’t trade it. You just need to be careful you don’t become the market. And there’s nothing wrong with trading this the old-fashioned way and buying shares.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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