Updated Dot Plot
September 20, 2023
Almost all developed markets have been forming bearish distribution patterns over the last two months and the small-cap Russell 2000 (RTY) has been one of the weaker major US indices during this period. The RTY has held its 200-day moving average multiple times since late July and is testing it again today. Small-cap companies are thought to be more susceptible to a rising cost of capital than larger cap companies, and a break below technical support makes sense given the currently challenging rate backdrop. The equal-weight S&P 500 Index (SPW) is probably the second weakest US index. Its relative outperformance this morning adds a glimmer of hope into today’s Fed decision.
The intrigue for today’s meeting is mostly focused on the Fed’s updated dot plot. The median ’23 dot is expected to remain unchanged, reflecting one more hike this year. We see a 20% probability for the median ’23 dot to price out an additional hike. Unfortunately, we see a 50% probability for an upward revision to the longer-run median dot, which has been at 2.5% since 2019.
After today’s Fed decision works its way through markets, attention will turn to Friday’s flash manufacturing and services PMIs. US manufacturing PMI has been in contraction territory since February and we see little fallout from a sub-50 print. By contrast, services PMI has been in expansion territory over that same period, but its decline to 50.5 in August puts the index very close to turning negative. A services PMI below 50 would likely increase recession concerns and increase the significance of next week’s personal income data for August. The health of the consumer remains at the forefront of recession concerns given elevated energy prices, fading back-to-school tailwinds and the resumption of student loan debt repayment.