The US Federal Reserve slowed the pace of tightening last week with a 50 basis point interest rate hike, but was against easing policy. It saved the guide “continuous increases”with President Powell emphasized that the bank “There is still not a sufficiently restrictive political position.”.
Moreover, officials have upgraded their view of the appropriate policy path, now expecting interest rates to average 5.1%. This is a big bump from the previous forecast of 4.6% and implies an increase of another 75 basis points.
This sent Wall Street into another losing week despite an initially underwhelming response, while SPX500 faces further pressure as the Bank of Japan surprised markets with today’s policy adjustment. Unlike its main counterparts, the BoJ is on the far side of the policy spectrum, but now expanded the scope of yield curve control around 0.5%, around 0.25%.
This change opens the door to a normalization of the hyperdovish strategy and could have broader market implications as it could lead to repatriation of funds, which would hurt global stocks.
This is an unfavorable environment SPX500which is now exposed to support at 3696, although October’s two-year low (3501-3491) looks distant at this stage.
On the other hand, markets are not convinced that the Fed will raise interest rates as much as its updated forecasts suggest. CME’s FedWatch Tool assigns the highest probability to a terminal rate of 5.0% and sees rate cuts in the second half of 2023.
Moreover, the decline SPX500 the outlook is overextended, and recovery efforts from current levels would not be surprising. However, a significant improvement in sentiment will be required for the daily close of the EMA200 (3,900-30), which will change the bias to the upside.
Markets will now look to the PCE inflation update on Friday and the final quarter GDP the day before.