US STOCKS OUTLOOK:
- U.S. stocks rally despite the Federal Reserve’s aggressive 75 basis points hike
- S&P 500 rises 1.46%, the Nasdaq 100 gains more than 2.4% as U.S. Treasury yields head lower
- Slowing economic growth and tighter monetary policy will be headwinds for risk assets heading into the second half of the year
After a subdued performance on Tuesday, U.S. stocks jumped on Wednesday, with the tech sector leading the charge higher in the equity space, despite a hawkish move by the Federal Reserve at its June gathering. When it was all said and done, the S&P 500 advanced 1.46% to 3,789, but was unable to exit bear market territory, a situation that may keep sentiment fragile. The Nasdaq 100, for its part, surged 2.49% to 11,593, although it finished the day well off session highs.
The Fed today delivered a 75-basis points interest rate increase, the largest hike since 1994, suggesting that policymakers are very nervous about blistering price pressures in the economy and are desperate to regain control of the narrative.
Stocks would normally react negatively to a very aggressive central bank measure, but they notched solid gains this time. The bullish response, however, can be attributed to Chairman Powell’s comments and cautious stance during the press conference.
When questioned by a reporter about the normalization roadmap, Powell didn’t rule out the possibility of another supersized 75 bp move at the next meeting, but said hikes of that magnitude would not be common, paving the way for U.S. Treasury yields to pull-back. These remarks led traders to speculate that that the ongoing process to remove accommodation will not be as forceful as initially predicted, sparking a relief rally on Wall Street.
Looking ahead, Wednesday’s price action may not necessarily signal that the worst is over. While the Fed seems reluctant to raise borrowing costs by 75 basis points on an ongoing basis, this does not mean that its hiking cycle will be immaterial, especially given that after the last three decisions, the institution is still expected to deliver 150 basis points of additional tightening in 2022.
Taken at face value, the FOMC‘s path suggests that interest rates will rise above neutral and turn restrictive sometime in the second half of the year. Restrictive monetary policy at a time of rapidly slowing activity will become an additional drag on economic growth, increasing the likelihood of a recession in the medium term. This scenario does not bode well for corporate earnings nor stock prices.
S&P 500 TECHNICAL ANALYSIS
After selling off aggressively earlier this month, the S&P 500 has managed to rebound modestly off channel support, stretching from 3,700 to 3,735, but it hasn’t yet staged a meaningful comeback. To have confidence that the worst is over and that this isn’t another dead-cat bounce, the index must climb above resistance at 3,810 and reclaim the psychological 4,000 level. On the flip side, if sellers retake control of the market and push prices below 3,735/3,700, downside pressure could accelerate, exposing the 3,500 area, a key floor created by the 50% Fibonacci retracement of the 2020/2022 rally.