The key event scheduled for this week is the Federal Reserve’s two-day
meeting, commencing on Tuesday and concluding on Wednesday with an
announcement on the interest rate decision. Markets anticipate a rate hike,
which would bring the interest rates to their highest level in 22 years, as
part of a series of historic rate increases aimed at curbing surging
inflation. Futures traders expect a 25-basis point increase, and this
decision has already been widely anticipated, shifting the focus to Federal
Reserve Chair Jerome Powell’s remarks during the subsequent press
conference on Wednesday afternoon.
Presently, the market expects this to be the final rate hike from the
Federal Reserve, given the aggressive tightening measures taken to combat
the soaring inflation. However, there is a possibility that the Fed might
hint at the potential for another rate increase later in the year—making it
the 12th rate hike since the series began last spring, even though
inflation has shown signs of cooling in recent months.
The CME FedWatch Tool, which gauges market sentiment, does not indicate
expectations of further rate hikes in the coming months. Nevertheless, it
is anticipated that the Federal Reserve will adopt a more cautious tone and
emphasize the need for sustained progress in economic data before declaring
inflation to be under control. Chairman Powell’s statements may shed light
on the Federal Reserve’s stance for the second half of the year, including
the likelihood of an early conclusion to rate hikes.
In addition to the Federal Reserve’s meeting, economic data scheduled for
later this week will provide further insight into this trend. The Gross
Domestic Product (GDP) for the second quarter is expected to be released on
Thursday, while the latest reading of the Federal Reserve’s preferred
inflation measure, the Personal Consumption Expenditures (PCE) index, is due
on Friday.
The markets have started the week on a positive foot, but investor’s focus
is on earnings reports from 165 S&P 500 companies, including several
mega-cap tech stocks known as the « Magnificent Seven » that have been major
drivers of market growth in recent months.
Source: TradingView
Recent optimism regarding the economy and the potential for easing
inflation is notable, with confidence levels reaching heights not seen
since 2021. Economists are observing improved business conditions, and
investors are growing more optimistic about the Federal Reserve’s ability
to achieve a soft-landing scenario, where inflation is brought under
control without adversely impacting the economy.
This newfound confidence is underpinned by the slowdown in inflation and
the economy’s resilience, despite the Federal Reserve implementing ten
consecutive rate hikes since March 2022. Consequently, concerns about an
imminent recession have been somewhat alleviated, with some Wall Street
analysts now projecting a milder recession that may occur later than
initially expected.
The recent data shows a slowdown in inflationary pressures, with the
Consumer Price Index (CPI) rising by 3% in June, a significantly slower
pace compared to the four-decade high of 9.1% in June 2022. Furthermore,
the Federal Reserve’s preferred inflation indicator, the Personal
Consumption Expenditures (PCE) price index, rose by 3.8% in May compared to
the previous year, down from the 4.3% annual rise recorded in April. The
June reading of the PCE index, eagerly awaited by the market, is scheduled
to be released on Friday by the Commerce Department.
From a technical analysis perspective, the price action remains
constructive and despite the overbought Relative Strength Index indicator
readings we do not expect anything more than a short-term pull back at this
juncture in time. The momentum conditions are strong and bode well for
further advance in the coming months.
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