The Central Bank emphasized the need to fight inflation even if it meant slowing an economy that already appears on the brink of a recession, according to meeting minutes released Wednesday. Participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting on July 27. What does it mean for the Market ahead? let's analyze.
Last FOMC on June 15th the Fed hikes 75 basis points, the largest hike since 1994, not before leaking the info to Wall Street Journal, so the market can price in the hike and wouldn't be surprised (as I wrote last week, the market was surprised and reacted accordingly with 3 bear gaps that we haven't seen such reaction since March 2020).
There are 4 points I took from the Fed Minutes that I think will help to try to predict what's ahead for the markets:
- Inflation expectations becoming anchored higher longer term.
- Recognization of the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to presist.
- Policy firming could slow the pace of economic growth.
- Fed projects the median federal funds rate will reach 3.4% by the end of 2022.
To summarize, The Fed admits that monetary policy will slow down the economy (Recession someone?), and will not hesitate to tighter the policy as the FED is afraid of the low customer sentiment (Yes Investors, he currently cares more about the fact that customers fear recession and high inflation rather than the investors in Wall Street).
Prediction of Fed Fund Rate of 3.4% by end of 2022 (The current FFR is 1.5-1.75%), which means we are only halfway to the destination, bad news for investors who hope to pivot soon. (and that without the fact that the fed is flexible and may change its target if the inflation keeps remaining high).
The market is only priced in 3.25-3.5% by the summer of 2023 - followed by at least one rate cut. In addition, while the market has priced in 80% lock for 75 basis points, the expectations for hikes in September have tumbled and for the rest of the year, almost gone.
So how to prepare ahead?
It clears that the market hasn't priced currently the situation, which means we are going to face more downside in the coming months. We shall also keep in mind that we are entering into earning season, and I expect lots of companies to warn of a slowdown ahead of a recession (as I said a few days ago, I believe the market hasn't fully priced in recession).
The market rallied this week due to the anticipation of Biden may ease Chinese tariffs and that the FED fights inflation. I do believe it is just a relief rally. The $SPX may continue to range between 3700 to 3900. Breaking the resistance of 3850, I would look for 3870, 3900, 3950, and 4000. if the market can't break 3850, look for 3820, 3800, 3750, and 3700.
Please trade carefully and follow levels.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision. The views, thoughts, and opinions expressed here are the author’s alone.