The FOMC Policy Decision caused a big rethinking in the market. Until then, the market was hoping for a less hawkish Fed as price pressures eased and was expecting some signals of a turning point.
Instead, the Dot Plot showed a peak rate of 5.1%, which is a bit higher than the market expectations before the event, but the more hawkish part is that for 2024 they forecast a rate of 4.1%, which means a higher for longer intention. Another notable thing is that they could have revised the Dot Plot until Tuesday evening, which is after the CPI report miss, BUT they intentionally chose not to.
The other more hawkish stuff came from the Fed Chair Powell press conference as he pushed back against rate cuts bets for next year and repeated that they will “stay the course until the job is done” to avoid the mistakes of the 1970s when the Fed prematurely eased monetary policy and had to fight with repeated inflationary waves.
The Fed also keeps on repeating that the labour market is extremely tight. They won’t have confidence in lowering interest rates until they see unemployment picking up. Even though inflation data may continue on showing relief, the Fed clearly wants to see the labour market to show weakness as well. To achieve this, they need a proper recession and that’s what the bond market may be seeing. For the stock market, on the other hand, it’s not good news as a possible overtightening from the Fed and a serious recession are two of the worst scenarios.
There’s also some talk that the stock market bottoms as the inflation rate peaks. But taking that into further context shows that it does so only when other leading indicators like PMIs bottom as well. Below you can see a chart showing this relation. This may be the top in the “bear market rally” we saw for the last 2 months.
Chart from Michael Kantrowiz on Twitter @MichaelKantro
S&P500 Technical Analysis
Recent two weeks of price action and catalysts on the S&P500 on tradingview.com
On the technical side as you can see in the chart above, the price has been chopping around for the last 2 weeks between the blue downward trendline and a strong support area. We saw some risk-off sentiment as some tier one economic data beat expectations and some risk-on sentiment as the CPI missed expectations. The more hawkish than expected FOMC Policy Decision was the ultimate catalyst that pushed the market down and led the price to break the strong support in the 3920-3940 area.
Looking at the daily chart below we can see that the price couldn’t break the big blue downward trendline after the CPI miss and resulted in a fakeout with a big perfect shooting star candlestick pattern. You can also see that the price was diverging with the RSI near the top of the trendline signalling a weakening momentum. Afterwards the more hawkish than expected FOMC Policy Decision pushed the market down and led to the break of the blue support area. The price couldn’t break that area and got immediately rejected after the spike from the CPI report.
Daily chart of the S&P500 on tradingview.com
With such fundamental and technical reasons, we can expect the price to continue downward and possibly reach the October low at the 3502 level.