Stocks Week Ahead
This week’s economic calendar may not be as packed with data, but it will feature a 20-year Treasury auction and a Q&A session with Jay Powell at the Economic Club of New York, just before the Federal Reserve’s blackout period begins on October 19th.
Market indicators suggest that the rate hike probability in November is quite low, at less than 10%, while the odds for a December rate hike are less than 40%. Given these numbers, making a public statement heading into the November Fed meeting might seem unnecessary, which makes this week’s appearance a bit odd.
Over the past week, various Federal Reserve officials have leaned towards the idea of no further rate hikes, a sentiment mirrored in the market. Powell has a history of stepping in to balance market sentiment. When sentiment becomes too hawkish, he provides a more dovish perspective, and vice versa.
Market indicators suggest that the rate hike probability in November is quite low, at less than 10%, while the odds for a December rate hike are less than 40%. Given these numbers, making a public statement heading into the November Fed meeting might seem unnecessary, which makes this week’s appearance a bit odd.
Over the past week, various Federal Reserve officials have leaned towards the idea of no further rate hikes, a sentiment mirrored in the market. Powell has a history of stepping in to balance market sentiment. When sentiment becomes too hawkish, he provides a more dovish perspective, and vice versa.
The Bloomberg Financial Conditions Index aligns with this assessment, indicating that conditions remain loose. A reading above zero suggests that conditions are currently accommodative to neutral regarding the state of the economy. In the Bloomberg model, a reading above zero signifies easing, while a reading below zero indicates tightening.
Given the current economic conditions, it would be prudent for Powell to maintain the ongoing trend of tightening financial conditions and avoid giving them room to ease, particularly in light of the recent hotter-than-expected Consumer Price Index (CPI) data for both month-on-month (m/m) and year-on-year (y/y) readings.
Furthermore, it’s worth noting that the super core CPI has shown consistent acceleration for three consecutive months, culminating in a 0.6% m/m increase in September. Powell’s approach should be to keep financial conditions on a tightening trajectory to help mitigate inflationary pressures.
Furthermore, it’s worth noting that the super core CPI has shown consistent acceleration for three consecutive months, culminating in a 0.6% m/m increase in September. Powell’s approach should be to keep financial conditions on a tightening trajectory to help mitigate inflationary pressures.
At this juncture, it seems crucial for Powell to maintain a hawkish tone, which doesn’t necessarily require him to threaten further rate hikes. Instead, he can reiterate the importance of keeping rates at a restrictive level for an extended period. Additionally, he could suggest that the neutral rate of the economy may now be higher than before the pandemic.
US Dollar Could Rally Further
The prospect of rising rates on the longer end of the yield curve will likely exert upward pressure on the Dollar Index, which has already broken free from a previous downtrend. This momentum could propel the Dollar Index to move higher, aiming for levels around 107.25 once again. This scenario aligns with the idea that rising interest rates can attract capital flows into a currency, driving its value upward.
The prospect of rising rates on the longer end of the yield curve will likely exert upward pressure on the Dollar Index, which has already broken free from a previous downtrend. This momentum could propel the Dollar Index to move higher, aiming for levels around 107.25 once again. This scenario aligns with the idea that rising interest rates can attract capital flows into a currency, driving its value upward.
S&P 500 Earnings Yield Forming an Inverse H&S Pattern
It appears that the earnings yield of the S&P 500 has two potential technical patterns. The first is an inverse head and shoulders pattern, and the second a flag pattern, both of which are common technical chart patterns; it could suggest that the earnings yield still has room to rise from its current level.
It appears that the earnings yield of the S&P 500 has two potential technical patterns. The first is an inverse head and shoulders pattern, and the second a flag pattern, both of which are common technical chart patterns; it could suggest that the earnings yield still has room to rise from its current level.
Sharp Drop in S&P 500 Cash Index
The break in the uptrend of the S&P 500, particularly following the sharp drop associated with the weak 30-year auction on Thursday afternoon, is a significant technical development. If this break in the uptrend is part of a larger pattern, it suggests a potential downside target of around 4,100. This level corresponds to a 100% extension of the price range from the September 14 high to the October 4 low. Moreover, it’s interesting to note that this projected level aligns nicely with a support level dating back to mid-May. $.SPX.US$ $.IXIC.US$ $.DJI.US$ $SPY.US$ $QQQ.US$
The break in the uptrend of the S&P 500, particularly following the sharp drop associated with the weak 30-year auction on Thursday afternoon, is a significant technical development. If this break in the uptrend is part of a larger pattern, it suggests a potential downside target of around 4,100. This level corresponds to a 100% extension of the price range from the September 14 high to the October 4 low. Moreover, it’s interesting to note that this projected level aligns nicely with a support level dating back to mid-May. $.SPX.US$ $.IXIC.US$ $.DJI.US$ $SPY.US$ $QQQ.US$
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