S&P 500 Loses Steam After Robust Friday Rally – FOMC in Focus

S&P 500 – Talking Points

• S&P 500 fails to hold Friday gains above 3900, 3860 support eyed
• FOMC decision on Wednesday looms with 75 basis points expected
• US nonfarm payroll data on Friday ends a week full of event risk

US equities sit firmly in negative territory to begin the week as traders look to Wednesday’s key FOMC policy decision. Markets are expecting another 75 basis points (bps) from the Federal Reserve, but attention will focus on any potential clues for upcoming meetings. Over recent weeks, traders have pulled back expectations for the Fed’s terminal rate following smaller-than-expected hikes from the Reserve Bank of Australia and the Bank of Canada. As a result, the US Dollar Index (DXY) has cooled from cycle highs while equities have rallied.

Friday’s gains in the S&P 500 came off the back of extremely strong Apple quarterly results, with the tech behemoth pulling the market higher despite Amazon’s poor quarter. This earnings season has taught us that companies who beat are being rewarded handsomely, while those that miss estimates are severely punished. One only has to look at Apple and Meta following their respective earnings releases.

With the mega cap tech earnings behind us, the debate surrounding the future path for risk assets shifts back to central bank policy and economic data. Besides the “super bowl” of central bank meetings, this week sees PMI data and nonfarm payrolls (NFP) for October to round out the week. The NFP print may garner significant attention following the Fed meeting, as it may set the tone for market pricing of the Fed’s terminal rate. Fed Chair Jerome Powell and his colleagues are still eagerly awaiting progress on both sides of the mandate, in the form of lower inflation and a loosening of labor market conditions.

Upcoming US Economic Calendar

Courtesy of the DailyFX Economic Calendar

Following the October 13th post-CPI dip to fresh YTD lows at 3502, the S&P 500 has rallied sharply into trendline resistance here around 3900. Friday’s highs topped out right at this descending trendline that stems from the August swing-high, which also marked the high during September’s strong rally. Should bears regain control here after a rough few weeks, we may trade back down to the 3802-3820 zone ahead of Wednesday’s FOMC meeting. Bulls understand that they must break trendline resistance in order to continue this rally, but ammo for such a move may be hard to come by ahead of such a major risk event.

S&P 500 Futures 8 Hour Chart

Chart created with TradingView

All eyes now shift to Washington DC and Fed Chair Jerome Powell, with the tone of his speech likely to be the sole determining factor in where we trade next. While the markets lately have moved to call the Fed’s bluff, Powell has gone out of his way since Jackson Hole to remind markets of his hawkish intent. Chair Powell appears unmoved in his commitment to return inflation to the Fed’s 2% target, even if there is some pain for the economy. If this is the message the markets get on Wednesday and not one where Powell hints at a slowdown in the pace of hikes, lower prices may be in store very quickly.

The market continues to buy the idea of a Fed pivot, but Powell continues to push back. With no clear data to show inflation rolling over or the labor market easing slightly, a truly “data dependent” Fed has no choice but to continue along with their tightening campaign. Markets may swing violently into and after the meeting should we experience a volatile repricing of the Fed’s terminal rate, which now sits back below 5%.

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— Written by Brendan Fagan

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