All eyes turn to the US Federal Reserve this week, as the wave of interest rate hikes continues worldwide:
Tuesday, July 26
Wednesday, July 27
Thursday, July 28
Friday, July 29
Let’s be clear: anything other than the widely-expected 75-basis point hike by the Fed this week would be a surprise.
Up until recently, some corners of the market had even tried to price in a supercharged 100 basis point hike, but that was then brushed away by some Fed officials. After all, those market participants were merely reacting to yet another US CPI print that came in above Wall Street’s median estimates. The June consumer price index rose by 9.1% compared to the same month in 2021; that was its fastest advance since November 1981! The higher-than-expected headline CPI showed that US inflationary pressures had yet to peak despite the ongoing Fed rate hikes since March.
Could the Fed spring a dovish surprise?
With the bar set high for a 100bps move, let’s then consider the case for a relatively smaller 50bps hike (even though such a move would still be twice the traditional size of 25bps rate adjustments per meeting).
Last Friday, the widely followed PMI surveys painted a very grim picture in the US (and Europe too). Although the ISM data is more popular, the services PMI dropped into contraction territory while the manufacturing figures weren’t far behind. These come on the back of a big fall in the July US Philadelphia Fed survey and a rise in initial jobless claims last week as well.
Then later this week, we’ll find out more about recession worries when US Q2 GDP is released the day after the FOMC meeting. The economy contracted last quarter and another negative print would meet the definition of a technical recession. Wall Street economists expect a positive number, while in contrast, the Atlanta Fed GDP Now model points to a 1.6% decline.
The Fed could begin pulling back on jumbo-sized 75bps hikes, in favour of a 50bps, if the economic damage is already becoming evident.
75bps hike remains base case
However, this upcoming June PCE deflator due on July 29th, which is the Fed’s preferred benchmark for setting its inflation target, is still set to point to unrelenting inflationary pressures. Market estimates forecast a 6.6% print, which would still be more than 3 times above the Fed’s 2% target.
Overall, Fed officials have their eyes firmly on quelling the inflation beast, at the expense of US economic growth. Hence, the 75-basis point hike that’s well-telegraphed.
S&P 500 bulls want to avoid return into ‘bear market’
At the time of writing, the S&P 500 is down 17.4% from its record high, registered on January 3rd this year. The blue-chip US stock index is still nursing its wounds after having fallen into a bear market (20% drop from its peak) last quarter, with the 20% threshold being denoted around the 3800 mark.
However, the buy-the-dip action by stock bulls have managed to help the S&P 500 resurface and shed that ‘bear market’ tag, at least for the time being.
A more hawkish cry from the Fed this week, perhaps paving the way for more 75bps hikes over the rest of 2022, could trigger another leg down for US stocks and may re-enter bear-market territory.
However, a surprise 50-bps hike this week, with the Fed perhaps shying away from 75bps hikes over its upcoming weeks, could reinvigorate stock bulls.
From a technical perspective, stock bulls must first conquer the S&P 500’s downward trendline since end-March as the immediate resistance, followed by the 4100 support/resistance line.
Stock gains must also be enabled by resilient earnings guidance due this week by some of the largest stocks on the S&P 500, including Apple, Amazon, and Alphabet. Negative earnings surprises out of Big Tech could well undermine hopes of an immediate recovery for this benchmark US stock index.