S&P 500 is now above the Powell 'Put' (July 26th) as the Fed has decided to slow down its rate hikes, with its fight with inflation which is still at 40 year highs. Confusion and hope is guiding market expectations.
Chart 1
Markets have rallied, once again, purely on the Federal Reserve's dovish/hawkish confusion, which probably shows more dissention than not as members of the Central Bank trying to factor in whether American is in a recession or heading towards one. Mixed with hope that inflation has peaked, either way, FED watch calculations have a interest rate set for the end year at their December 14th meeting, at 0.50% and the target (terminal) rate in 2023 sitting under 5%. With the tech sector cutting jobs at a rapid rate, investment bank Morgan Stanley has played this down, saying it is no bellwether for the greater U.S. economy. But, ironically, the investment bank is also cutting back jobs before the end of 2022. So, the market can't clearly price equities anymore or less than algorithmic systems scanning for deflation cues and the Fed pausing its rate hikes, while the global economy faces the worst inflation in 40 years.
Chart 1. Shows the Powell 'Put' at 3698 July 27th 2022 now a support for the S&P 500 trading above 4000, further indicating the the Fed were clearly in favor of drawing a line under stocks and bringing down the bid U.S. Dollar after their July meeting, hence the narrow trading rages thereafter. As noted with Chart 2, showing the USD futures and the S&P 500 beginning to diverge.
Chart 3. Is the CPI, PCE, U.S. Import prices and current interest rates (ref: all call out tags), as you an see inflation is still running at multi decade highs and is stubbornly, refer to core inflation (minus food and fuel), stuck above 5%. The Fed, like most global central banks are reluctant to slam inflation down with higher rates, note the horizontal lines at 5% and 9% , five percent being the bond markets terminal rate for the Fed, the nine percent is my thoughts, since America is not in a recession (yet) and oil remains above $75 a barrel. Energy inflation is the main primer that the would lead into stagflation in 2023.
In the meantime all eyes on the Russian and gas oil cap/s and Biden continued SPR draws and China's COVID numbers, which could bring the oil price down under $60.
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All market commentary: chiasmusmagazine.blogspot.com/search/label/markets
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