The subdued price action suggests a conflict between investors looking for an early end to Fed rate hikes and those looking for more rate hikes.
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.
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.
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.
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.
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.
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.
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.
James Hyerczyk is a U.S. based seasoned technical analyst and educator with over 40 years of experience in market analysis and trading, specializing in chart patterns and price movement. He is the author of two books on technical analysis and has a background in both futures and stock markets.