Stock investors kicked off the week on a cautious note, as the Federal Reserve (Fed) is expected to kill joy when it announced its latest decision tomorrow, and earnings announcements may not save the day.
Some profit taking
US equities kicked off the week on a negative note, as many investors preferred booking profits before the deluge of earnings announcements and the Fed decision.
And they are certainly not wrong to be scared, because the Fed expectations became increasingly dovish in January, as investors saw the easing inflation figures combined with softening economic activity.
The S&P500 gave back 1.30% on Monday. The index is still above the 2022 bearish trend and above the 200-DMA, but we can’t rely on Jerome Powell to keep the party going; only stronger-than-expected earnings, and ideally sufficiently good profit guidance from companies could do it – and spitting out a good guidance won’t be a piece of cake for a good amount of them.
Crude Oil down despite strong China PMI, encouraging IMF growth forecast
US crude fell 2% yesterday and slipped below the 50-DMA this morning.
Interestingly, however, the latest news on the macro front is not bad, at all. The Chinese reopening is now well reflected through the first set of economic data. Released today, both the manufacturing and services PMI jumped into the expansion zone.
And the cherry on top, the IMF raised its growth forecast for this year by 0.2% to 2.9% citing the resilience of US spending and the Chinese reopening.
This is the kind of news that the energy markets normally cheer. But not this time, apparently.
Won’t call victory over inflation
The US dollar is gaining some positive momentum into the Fed meeting, as investors know that the Fed won’t declare victory over inflation despite the falling inflation, and position accordingly.
Why? Because the trend could reverse suddenly.
The Spanish inflation came as a punch to the Europeans’ face yesterday as it advanced to 5.8% in January instead of falling to 4.7% as expected. French and German readings could reveal similar surprises.
And nothing guarantees that the same U-turn won’t happen in the US. Gasoline prices surged 12.5% over the past month on the back of winter storms and a rising global demand – partly thanks to the ban on Russian oil and the Chinese reopening, and food price inflation remains high.
So, the Fed will certainly hike by 25bp, but there is little chance it will announce the end of the tightening.
And Jerome Powell will certainly try to calm down market joy – given that the actual market environment suggests that the financial conditions in the US have become as loose as last February, before the Fed started tightening its purse’s strings.
And the more the market fights the Fed, the more aggressive the Fed should become to achieve what they need to achieve.
In summary, the Fed will likely reveal that there will be at least one more rate hike, or two more rate hikes to go before pause.
And that simply ‘s’ could make all the difference.