Here we are. The FOMC will announce its interest rate decision at 22:00 EET. To get straight to the point, this is possibly the last chance to trigger the long-awaited Christmas rally that could bring the major US indices’ YTD performance back into green territory.
As we have repeatedly stressed in our reports, we have a bearish outlook on the stock market going into 2019, and this view will not change regardless of today’s decision. In our opinion, the global economy is heading towards a slowdown whose magnitude is well beyond the forecasts published by the world’s major financial institutions, who have already revised their numbers downwards as opposed to in the previous quarters of 2018. I am afraid that we’re going to see further such downward revisions in the quarters to come and that financial markets will follow suit.
Since Q1, we have been warning that the anticipated three interest rate hikes in 2018 would most likely be four. The reasoning behind this was mostly based on the extremely expansive policies implemented by the Trump administration, namely the corporate tax cuts, which were put in place in an economy which was already in very good shape, posting very strong macro data, and with an unemployment rate at a multi-decade low. It was obvious to us that the impact of such measures would run the risk of the economy overheating towards the end of 2018, thereby forcing the Fed to act aggressively to prevent such a scenario.
All of the above still stands, and the consensus is for the fourth 2018 rate hike to take place this afternoon, even if some discordant voices have emerged in the last few hours. The latest movements of the stock market, the bond market, and of commodities like oil are sending worrying signals to investors.
As you might remember, we underlined the yield curve inversion on short-term maturities and the possibility of oil prices continuing their downwards movement despite the production cuts agreed to by OPEC earlier this month.
Here is the Brent chart for reference:
This is all reflected by price movements on the stock market. Last week was yet another negative one: the DJIA closed the week 1.2% down, bringing its YTD performance to -2.5%. The S&P500 and the NASDAQ are in a similar situation: -1.3% weekly (-2.8% YTD) and -0.8% weekly (+0.1% YTD) respectively. The Russel 2000, which as we mentioned is a clear indicator of the expectations of institutional investors, closed the week 2.52% down (-7.1% YTD).
The week started in negative territory, and only today have we started seeing some sort of pullback.
Here is the situation on the S&P500:
The situation is not good for this index (although the DJIA and NASDAQ really don’t look that different). That double top was successfully tested and the base of the rectangle broken. That means a theoretical target at 2,400 points!
The delicate situation, along with President Trump pressuring the Fed to avoid raising rates, has led some analysts to shift their stance and predict a pause in the rate hike trajectory, starting with today’s FOMC meeting.
While it is true that in general terms, keeping the rate at its present level should be good news for the stock market, it is also true that such a move could also signal a loss of confidence on the Fed’s part regarding the future course of the economy, thus triggering the opposite reaction from investors, who might think about trimming their exposure by reducing the equity stake of their portfolios.
I still think that, short-term volatility aside, we’re in a downwards trend, as I believe that the global economy is set to be hit by a stronger-than-expected slowdown. As I’ve said in my interviews with mainstream media, there is a finite amount of bad news that markets can sustain, especially after an exceptionally long period of monetary stimulus that is now fading away, and that mark has probably been passed.
One of the outcomes of this meeting could be that of confirming the rate hike while presenting a more dovish stance on the future trajectory. That could calm markets towards the year’s end and have a bearish impact on the greenback.
With regard to the euro, USD could lose ground as a result of such a stance from the Fed, which could be amplified if we get confirmation of the rumours about the latest version of the Italian budget being accepted by EU officials, which would avoid the infraction procedure to be triggered and deescalate the standoff that has been going on since September.
Here is the situation on the EURUSD pair:
Once again, we’re in a situation where indicators are signalling a possible reversal, and the on the eve of the Fed’s decision, investors factored in the possibility of the dollar being impacted negatively by Powell’s statement.
We are a few hours away from the announcement.
Brace yourselves for volatility and manage your exposure appropriately!