Markets Bounce Ahead of Fed Decision

Expectations among traders is that the Federal Reserve will hold rates steady on Wednesday, which would mark the first meeting where the Fed hasn’t raised rates in more than a year, but it’s likely to be a close call, as Tuesday’s U.S. inflation reading could impact the decision.

While the Fed may hike rates one more time in July, the hope on Wall Street is that it won’t go beyond that as inflation has been moderating from its peak last summer. Investors’ focus would be on the ‘dot plot’, which outlines policymakers’ expectations for future tightening.

The market is widely expecting that the Fed will deliver at least one more hike. The question is whether the hike comes at the June or the July meeting. The CME FedWatch tool shows the probability of the Fed hiking by 25 basis point on Wednesday is 36%.

Recent economic indicators present a mixed picture of the U.S. economy, as inflationary pressures are gradually easing but still surpass the central bank’s target of 2%. Meanwhile, the addition of a significantly higher-than-anticipated 339,000 jobs in May occurred alongside a cooling in wage growth.

Closely monitoring the impact of banking instability on the economy, the Federal Reserve has suggested that implementing stricter lending standards could help curb inflation, thus reducing the necessity for aggressive monetary tightening.

Contrary to concerns over recession, banking crisis, and surging Treasury yields, U.S. stocks have defied expectations, surging by 20% since their October 2022 lows—an accomplishment that defines a bull market. Historically, a 20% gain from the lows of a bear market has often signalled further upward potential for stocks.

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Source: Tradingview

While the declaration of the end of a bear market may appear subjective, with various definitions adopted by analysts, it serves as a valuable reference point for investors. From a technical analysis standpoint, a sustained break above the key resistance level of 4,325, representing the previous major peak of the preceding bear market, would indicate the start of a new bull market.

The most recent economic data suggests that the U.S. economy may not be on the path to recession. Despite grappling with the most severe inflation in generations and the swiftest interest rate hikes in decades, if the stock market continues its upward trajectory, it will demonstrate that the most recent bear market lasted a mere nine months. This bear market began on the 4th of January 2022, when the S&P 500 reached a record high of 4,818, and reaching its lowest point on the 13th of October 2022, at 3,491. This duration is shorter than the average bear market and resulted in a smaller loss compared to prior downturns.

A substantial portion of the gains witnessed during this bull market can be attributed to the economy’s steadfast resistance against a recession, despite repeated forecasts suggesting otherwise. It has weathered the impact of the highest interest rates since 2007, the collapse of three U.S. banks since March, the threat of a debt limit induced economic crisis, and a series of additional challenges.

In conclusion, the economy has demonstrated remarkable resilience. While it remains premature to draw definitive conclusions, stocks appear to be following their typical pattern when all the negativity appears to have been factored into the market—they commence an upward trend in anticipation of better days ahead.

Thus far, the economy has evaded recession due to a robust job market and robust consumer spending. A rally in mega-cap stocks, a better-than-expected earnings season, and the belief that the Federal Reserve is approaching the end of its rate-hiking cycle have buoyed U.S. equities this year, despite concerns surrounding the potential for recession and persistent inflation. The economy has proven to be more resilient against headwinds than anticipated.

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