Ahead of the Fed: Energy, Financials Energize Wall Street

U.S. equity markets ended firmly in the green, though off session highs, on Tuesday as investors prepared for Wednesday’s FOMC decision.

The Dow Jones Industrial Average was up 157 points, or 0.90% to 17525. The S&P 21 points, or 1.06% to 2043, while the Nasdaq Composite added 43 points, or 0.87% to 4995.

All 10 S&P 500 sectors were in positive territory as energy and financials led the way higher.

Today’s Markets

Will they or won’t they? That was the question global investors were asking on Tuesday as markets stole momentum from the final few minutes of Monday’s trading. The Federal Open Market Committee’s two-day policy meeting kicked off Tuesday, and at its conclusion Wednesday afternoon, investors will finally know whether short-term interest rates will head higher or remain lower longer.

The Fed has been dancing with the global markets over this issue for months as the U.S. economy has continued to find more solid footing after the 2008 financial crisis. Rates haven’t been increased in nearly a decade, but if the central bank opts to raise on Wednesday, it will be by 0.25% with likely no definite timeline for when the next hike will happen.

“I expect to see a liberal dose of ‘gradual,’ ‘shallow,’ and ‘measured’ in the text, coupled with a tone that is deliberate but open-ended in regards to any further moves. ‘Data dependency’ will be the gate keeper for any further tightening,” Peter Kenny, independent market strategist said in a note.

Goldman Sachs, meanwhile, said forecasts for what happens next are still varied.

“Market pricing of the path for the federal funds rate is well below the projections of many economic forecasters. At present, the market is priced for about two hikes in 2016 compared with four hikes in the FOMC’s dot plot and our own forecast,” a recent note explained.

That divergence is due mostly to economic projections that contrast with the probability-weighted nature of market pricing, the economists explained.

The central bank has made crystal clear it was heavily relying on a series of economic data as it looked for signs the economy was returning to full employment and price stability, or an inflation level of about 2%.

On Tuesday, investors receive three additional data points, however those won’t be included in the Fed’s rate-hike decision this time around, but will likely play a factor in the coming months.

The Labor Department reported inflation at the consumer level was unchanged on a monthly basis in November, matching expectations, while the volatile food and energy components stripped out, allowed prices to rise 0.2%. On a year-over-year basis, prices rose 0.5%, beating 0.4% expectations; ex food/energy, prices rose 2%.

Consumer-related names marched higher following the data including McDonald’s (NYSE:MCD), Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT), and Johnson and Johnson (NYSE:JNJ).

Also out was the latest read on Empire State factory activity from the New York Federal Reserve, which showed the gauge remained rooted in contraction territory this month. The gauge rose to -4.59 from -10.74 the month prior. Wall Street had expected a shallower rebound to -6 for the month.

Homebuilder sentiment from the National Association of Home Builders showed a slight decline as the gauge fell to 61 this month from 62 in November, missing expectations for a rise to 63.

Meanwhile, developments in the oil market have been closely eyed as prices have swooned over the last two weeks, though they continued to trade on more solid footing Tuesday as investors looked for buying opportunities.

The recent declines have stemmed from a decision by OPEC to keep production at current levels rather than cut output in an effort to help stabilize global prices and allow a glut of supply to begin to taper off. What made matters worse: The International Energy Agency said on Friday it expects that global oversupply to continue to be an overhang for the market at least through next year.

In recent action, West Texas Intermediate crude prices rose 2.86% to $37.35 a barrel, while Brent, the international benchmark, rose 1.40% to $38.45 a barrel.

Tony Roth, chief investment officer at Wilmington Trust, said like any other market, oil moves in steps, and the recent price action is more than anything, a supply-side phenomenon.

“The markets have interpreted oversupply in crude as an indication that global GDP is really slowing down, and while that’s true, on the margin, demand for crude has been flat for the past 24 months,” he said. “OPEC is letting its members pump without any caps, that we’re having record warm winter so far on the east coast are all essentially transitory that don’t speak to fundamental economy.”

Elsewhere in commodities, metals traded mixed: Gold fell 0.17% to $1,062 a troy ounce, while silver gained 0.54% to $13.74 an ounce. Copper declined 2.52% to $2.05 a pound.

In corporate news, 3M (NYSE:MMM) took a tumble after the conglomerate slashed its earnings forecast for this year citing a slowing global economy, though it promised to be committed to “controlling the controllable, and making investments for long term success” in order to see “efficient growth in 2016 and beyond.”