US equities struggled for direction overnight, with the S&P 500 and Nasdaq closing marginally lower as investors digested comments from Federal Reserve chairman Jerome Powell at the ECB forum.
Powell reiterated that the US economy was “well positioned to withstand tighter monetary policy” but cautioned about the Fed’s ability to achieve a “soft landing”. On the data front, the final reading of the US Q1 GDP was revised down to -1.6% from the previously -1.5%. This was the first contraction in quarterly US GDP since the pandemic-induced recession in 2020. Concerns about aggressive monetary tightening pushing the US economy into a recession are likely to intensify if economic data continues to disappoint. The risk-off mood has the potential to drag US equities lower as investors rush to safe-haven destinations.
Later today, the weekly initial jobless claims, personal income/spending, and PCE deflator for May will most likely hijack the spotlight. Given how the core Personal Consumption Expenditure (PCE) Index is the Fed’s favoured measure of inflation, this will be closely scrutinised by market players. According to a survey on Bloomberg, the PCE Core Deflator YoY is expected to have cooled to 4.8% in May compared to the 4.9% witnessed in the previous month. If expectations match reality, this could fuel speculation around inflation peaking – cooling rate hike bets.
We also have the US ISM manufacturing and Global manufacturing PMI figure for June on Friday afternoon which may show how the US economy is coping amid the Fed’s aggressive rate hiking cycle.
All in all, it has been a rough quarter for the S&P 500. During the middle of June, the index closed in a bear for the first time since March 2020 and has shed roughly 15.7% quarter-to-date. The horrible combination of recessions fears, jitters around soaring inflation, ongoing geopolitical risks, and aggressive Fed hike bets have certainly punished equity bulls.
It does not end here. The S&P 500 is on track for its worst first six months since 1970! The Index has dropped nearly 20% year-to-date. As we enter the second half of 2022, it will be interesting to see whether bears will remain in the driving seat or if bulls fight back.
In regards to the technical picture, the S&P 500 remains bearish on the daily charts. There have been consistently lower lows and lower highs while prices are trading below the 50, 100, and 200-day Simple Moving Average. A strong move back towards 3700 could tempt bears to drag prices lower with 3637 acting as a level of interest. Alternatively, a move back above 3810 could inspire a move towards the lower high at 3945 and then 4000 – where the 50 day SMA resides.