S&P 500, NASDAQ Struggle Early Ahead of Rate Hikes, Major Earnings Reports from Apple, Amazon, Alphabet

The major U.S. stock indexes are putting in a mixed performance early in the session on Tuesday as U.S. Federal Reserve’s Federal Open Market Committee (FOMC) kicks off its two-day policymaking meeting.

Big Disparity Between Market and Fed Expectations

The price action suggests a cautious tone with some investors looking for possibly a premature easing of financial conditions before the Fed ends its tightening campaign. Others, however, suspect the Fed may want to hang tough for a bit longer – stressing more needs to be done to ensure inflation is licked even as it slows the pace of rate hikes another notch to a quarter point rise on Wednesday.

This disparity is likely to be the source of volatility on Wednesday when the Fed makes its interest rate decision, followed by additional comments from Fed Chairman Jerome Powell.

European Central Bank, Bank of England Rate Hikes on Tap

While we expect to see volatility, we have some doubts about whether the Fed decision will launch another rally immediately. This is because of trepidation fueled by widely expected half-point rate hikes from the European Central Bank and Bank of England on Thursday.

Positive Impact from China Economic Activity, Euro Zone Surprise Improvement

On the positive side, there were signs earlier today that a global recession may be avoided. China’s economic activity swung back to growth in January after three months of contraction, according to official business surveys released on Tuesday. Additionally, the Euro Zone dodged a downturn due to falling energy prices. This news is important to longer-term bullish traders since China and the Euro Zone are the world’s second and third biggest economic areas.

IMF Turns Positive on US, European Economy

Underpinning the U.S. stock market ahead of the Fed was a report from the International Monetary Fund (IMF) which raised its 2023 growth outlook slightly due to “surprisingly resilient” demand in the United States and Europe, easing energy costs and China’s reopening.

But…Not All the News is Friendly

Reuters wrote, “Dogged by Brexit, tax rises and serial labor strikes, Britain was the clear outlier and is the only G7 nation to have suffered a cut to its 2023 IMF, with the economy set to shrink by 0.6% this year – a sharp downgrade from the prior IMF forecast.”

In other news, Spain reminded everyone on Monday that inflation rates can re-accelerate again even after peaking.

US Stocks Start Week in the Red

Besides the major interest rate decisions, U.S. investors will also be dealing with a continuation of the latest corporate earnings season – with more than a fifth of S&P 500 firms reporting this week alone and Apple, Amazon and Alphabet all due on Thursday.