On June 15th, yesterday afternoon, the Federal Reserve released the Federal Open Market Committee’s (FOMC) latest Summary of Economic Projections, coupled with their corresponding statement. They revealed that the FOMC had decided to raise the Federal Funds Rate by a whopping 75 basis points (bps), to a range between 1.5-1.75%; such a hike has not been seen since 1994. Upon this news, and ostensibly in response to Federal Reserve Chair Jerome Powell’s press conference afterwards, financial markets saw a great deal of volatility. The US Dollar Index (DXY) made gains before closing lower at 104.66, while the Dow Jones oscillated between 30,000 and 31,000 before closing slightly higher. Today DXY continues to sink lower as the Dow abandons yesterday’s gains, falling over 800 points intraday, below 30,000. With this context in mind, let’s unpack this as we learn 4 lessons from FOMC yesterday.
1) The Fed is Becoming Increasingly Hawkish
The 75 bps rate hike decision was somewhat shocking. Though an increasing number of analysts began predicting it earlier this week (with speculation about a supposed leak occurring), such an aggressive measure is rare by contemporary standards. Powell made it clear the bold decision was taken in response to May’s hotter-than-expected inflation data, a disturbing 1% CPI increase month-over-month, or 8.6% year-over-year. Though this had not been the FOMC’s intention prior to this information, Powell emphasized that they are willing to roll with the punches and are open to further aggressive measures so long as inflation remains a serious threat.
While he did convey that they will be planning each hike on a case-by-case basis contingent upon inflation reports, he seemed to be signaling that the Fed’s responsibility for price stability must temporarily take precedent over currently maximizing employment, that it might be maximized long-term. This reflects the tone of the hawkish FOMC statement as well, factoring into the aforementioned economic projections, which anticipate increased unemployment, slower growth, and at least a 3% Federal Funds Rate by the end of 2022. While invariably negative news for the stock market, this is perhaps more ambiguous for USD than it appears at face-value, since a seemingly positive hawkish agenda may be undercut by worsening economic expectations.
2) Powell is Unpredictable (Even to Himself)
A generous interpretation of Powell’s decision and rationale is that he reacts swiftly to the latest information. A more cynical interpretation, which some of the questions at the press conference reflected, is that he is fickle and erratic, indicating one set of monetary policy plans before scrapping them for new ones. After all, today’s hawkish FOMC Chairman is nearly unrecognizable from the COVID-era Powell who was fixated on economic stimulus and near-zero interest rates.
However, to Powell’s credit, he is rather self-aware on this matter. He was transparent yesterday about the fact that he is entirely unsure to what extent each rate hike will cool the overheated US economy, particularly in light of pervasive supply chain issues and externalities due to the invasion of Ukraine. These are holistically unusual circumstances, and the FOMC is confined to conducting an ongoing sequence of interest rate experiments to eventually establish an inflation solution. Though honest, this degree of transparency has likely not helped the public or markets gain trust in the Federal Reserve, and thus may have contributed to today’s securities selloffs.
3) Leave Room for Baffling Market Reactions
Upon reading the statement and watching the press conference, the Fed’s intentions left little room for interpretation in my eyes, striking me as hawkish in a clear-cut fashion. While Powell did leave some wiggle room for less aggressive responses if future CPI reports reflect inflation slowing down, he made it quite clear that more 75 bps hikes are on the table, even likely. Taken altogether, all the information provided yesterday appeared overwhelmingly bullish for USD, and bearish for stocks. While yesterday saw another bout of odd buying pressure for stocks upon the rate hike news, today’s decline is unfortunately a more understandable return to form.
However, DXY is down over 1% today intraday as USD plummets in value against other currencies. Despite today’s news on higher-than-expected US unemployment claims, as well as worsening economic conditions according to the Federal Reserve Bank of Philadelphia, this USD outcome has been surprising. Although economic expectations in the US are becoming gradually bleaker as recession fears grow, I had imagined that demand for USD due to huge rate hikes and persistent inflation would have outweighed selling pressure. While I am still anticipating this to be the case, it is helpful to remember that there is no certainty in the markets, and every bullish or bearish signal must be taken with more than a grain of salt.
4) Technical Analysis Still Matters
One factor that likely aided selling pressure for USD was how much buying pressure it had encountered in the days leading up to FOMC, perhaps in anticipation of the suspected 75 bps hike. This bullish momentum reflected in USD pairs, many cases of which led price action to a key level of support or resistance. Touching these levels, in conjunction with how overbought USD was purely from the standpoint of various technical indicators such as the Relative Strength Index and Keltner Channels, was a good recipe for price action reversing course.
This FOMC news is thus a great case study in (seemingly) straightforward fundamentals not exempting traders from having to conduct technical analysis. Even if foreign exchange markets favor USD bulls in the long run, bullish momentum will still almost certainly pause here and there while bears exhaust themselves. If this is the case, such a pause taking place at the intersection between key support/resistance levels and big central bank news was the perfect point to do so.
After a rocky first half of the year in the stock markets around the world, indices have fallen well off their highs as they enter correction territory. Global inflation and slowing economic growth has investors fearful of the risk-on environment, but that sentiment is bound to shift back at some point. Here are some possible setups on these indices as well as their potential bottoms for the next bull market.
England's stock market falls over 3% today, although price isn't too far from the highs in $7,690s. A triple bottom level another 3% lower looks like the index's first target price for a turnaround. The second level is a double bottom around 7% lower should the market continue to flop. Recent rate hikes and a retail slowdown has sunk shares today as well as sentiment, so a continuation to the downside seems likely.
Japan's stock market index is currently 16.84% off the highs from earlier this year as price falls another 3% today with the rest of the global equities. A potential bottom on this 1D timeframe looks like $24,482 where there is a previous bottom. Price could definitively sink lower, however, there are not many clean levels of support that would suggest an evident sign for a reversion.
Germany's index is down 4% today after FOMC and a rise in utility prices from slashing gas supply in the country. GER30 looks promising at the 61.8% Fibonacci retracement zone. More specifically, a previous resistance and support level at $11,311 suggest that price will move here which is deep into correction territory from 2020.
The S&P falls three and a half percent today in the aftermath of FOMC yesterday and the 75 bp rate hike. Three levels give us an idea where price might bottom out, but one of them has already been broken. The levels are at $3668, $3587 and $3392 respectively. The first two levels are basic long-term levels of support, but the last target is key since it is the highs of 2020 pre-pandemic.
The NASDAQ is taking the biggest loss today after being down over 4%. The index is 34% off the highs and stuck in a grossly sold off bear market. It looks like price will keep falling to a previous bottom around $10,699. If that level gets broken, the index could move to the highs of 2020 along with the SPX500 which would be at $9748, another 12.50% lower than current price.
US financial markets started the week in unpleasant fashion as stocks and Treasury notes sold off rapidly. The Dow has fallen over 800 points intraday; the S&P 500 is likewise down over 3%, or over 20% from its January high, with its transformation into a bear market being actualized. Treasuries briefly experienced a yield curve inversion as the yield on the 2-year note exceeded that of the 10-year note, an indication of impending recession, while yields for both securities reach decade-long highs. Meanwhile, DXY crossed above the 105 level as demand for USD grows before the Federal Open Market Committee’s (FOMC) rate hike decision on Wednesday afternoon. In preparation for Wednesday’s volatility, let’s discuss what the FOMC decision could mean.
Possibility #1: Market Expectations Met
Most analysts are currently anticipating a 50 basis point (bps) rate hike for the federal funds rate on Wednesday, which would put the target interest rate at 1.5%. However, potentially more impactful than the rate hike itself will be the FOMC press conference afterwards, and what details about future hikes Chairman Jerome Powell opts to reveal to the public as inflation and recession concerns mount. Given the importance of his comments, 50 bps hike expectations being met may not matter to the markets in light of the set of new expectations he generates.
Possibility #2: More Hawkish Than Expected
This could take at least two forms, such as a) an aggressive 75 bps increase to the federal funds rate on Wednesday, which some analysts are speculating, and/or b) Powell hinting at even further accelerated hawkishness to quell hyperinflation concerns. With this past Friday’s reveal of year-over-year US inflation being at 8.6% and considering the Federal Reserve’s consistently hawkish disposition in recent months, these could be plausible. This would signal continued bullishness for USD and bearishness for stocks.
Possibility #3: More Dovish Than Expected
This could similarly take at least two forms, including a) a mild 25 bps increase to the federal funds rate on Wednesday, which few analysts seem to be speculating, and/or b) Powell hinting at a return to dovishness to mitigate recession fears. With companies and investors facing plummeting share prices, coupled with Powell’s original comfort erring on the side of protecting employment over staving off inflation, this may be more possible than many think. This would signal a sudden departure from USD bullishness and would likely restore demand for stocks.
This morning saw demand for USD rapidly pick up steam as US inflation data came in hotter than expected. Month-over-month CPI had been forecast to rise by 0.7% in May; at 8:30 am Eastern Time, the Bureau of Labor Statistics revealed that it had increased by 1%, or 8.6% year-over-year, a forty-year high. Likewise, Core CPI (which excludes food and energy prices) was forecast to rise by 0.5% month-over-month, instead hitting 0.6%. On this news, the DXY is up 0.8% and has risen over the 104 level intraday, as EURUSD is down 1% and the S&P 500 is down nearly 3%. With this context in mind, let’s discuss 3 ways to capitalize on inflation now.
Trade Major Pairs
This CPI news is a huge fundamental catalyst for USD pairs since it verifies that the US economy is indeed still overheating, validating further interest rate hikes by the Federal Reserve. This is very bullish for USD, which makes buying the USD against other currencies even more appealing. If traders are searching for optimal USD pairs to take positions in, a good place to start is by locating pairs where analysis leans in USD’s favor to the greatest degree possible.
Some such options include a) shorting GBPUSD and EURUSD, which receive -7 (‘strong sell’) and -5 (‘sell’) signals, respectively, from the EdgeFinder, and b) going long on USDJPY, which receives a 4 (‘buy’) EdgeFinder signal. Because USD experienced so much buying pressure this morning, conservative traders may want to find an opportune point of entry by conducting technical analysis, e.g., waiting for a pullback and retest of key support/resistance.
Though admittedly a controversial opinion, I am waiting for an optimal point of entry to purchase gold against USD. XAUUSD experienced quite the selloff this morning before a startling recovery, jumping from a low of 1825 to hovering around 1855 at the time of writing this. This jump was seemingly prompted by finding support around the 1830 level, a clear zone of support on a 1-hour timeframe.
I interpret fundamentals being bullish for XAUUSD due to demand for the precious metal in several different industries and its historical status as a safe haven investment in times of economic crisis. There have been periods where gold’s rise in value does not correlate with USD depreciating in value, which is helpful to consider in cases like these. According to the latest COT data, institutional traders are similarly long on both USD (76%) and gold (73.56%). I am planning to purchase XAUUSD if price action retests the trendline depicted on the 1-day timeframe above, though this opportunity may not come if demand continues to grow quickly.
Invest in the Stock Market
Though it may seem strange in the face of persisting hyperinflation and potential for recession, economic downturns and stock selloffs do present myriad buying opportunities for long-term investors. If you are not planning on retiring for decades, you can utilize dips in the stock market and indices to build wealth over time, assuming you are willing to sacrifice immediate results. For example, when the Dow plummets over 600 points like it has today, investors can seize these events as opportunities for cheap purchases that will yield returns years down the road.
If your investment portfolio keeps crashing in the meantime, this does not have to be discouraging since they are merely unrealized losses; they will likely grow in value through the decades if you are invested in index ETFs and other trustworthy funds. Any further selloffs present even more opportunities for regular, small purchases. (However, investing in individual stocks is a completely different story, and I personally believe that even the most skilled retail investors are not sufficiently equipped to handle the inherent risks involved.)
The beginning of June 2022 marks the planned start of the Federal Reserve’s Quantitative Tightening (QT) program, a contractionary monetary policy tool intended to help curb hyperinflation in the US by reducing the money supply. Implemented in conjunction with the Federal Reserve’s plan to continue raising the federal funds rate by 50 basis point increments, this is a decisively hawkish agenda that will likely have an acute impact on the financial markets. Let’s explore further as we issue a warning: QT starting now.
A Brief History of QE/QT
QT is the ‘sibling’ program of Quantitative Easing (QE), its expansionary counterpart. QE is essentially a large-scale financial asset purchasing program that central banks utilize when their economy needs to be stimulated due to lower consumer spending, i.e., a mode of ‘money printing’. QE entails a central bank purchasing government bonds, mortgage-backed securities, and other assets to increase the money supply, creating new liquidity to encourage more lending, investment, and spending. QT has been described as the opposite of QE in the sense that it entails a subsequent central bank balance sheet reduction, effectively reducing the money supply and removing excess cash reserves to cool an overheated economy.
While the Bank of Japan is widely credited with pioneering QE in the early 2000s, the expansionary strategy was popularized by central banks around the world during the 2008 financial crisis. It saw even wider use in early 2020 onward, in attempts to combat global COVID-era economic catastrophe. However, despite its worldwide popularity, both QE and QT remain in their infancy, and are thus regarded as somewhat experimental programs.
Differences from QT in 2017
The last time that the Federal Reserve implemented QT was to reduce the size of its balance sheet back in 2017, after it had built up a (then) unprecedented $4.5 trillion portfolio. They began letting their securities mature gradually, starting around $10 billion per month and eventually quintupling that pace over the next few years. These measures, in conjunction with periodic interest rate hikes, correlated with relatively stable growth in the US economy.
Several variables have changed this time around: first, the rate hike agenda is far more aggressive than it was five years ago: Chairman Powell has made it clear that 50 basis point hikes are on the menu for now, a departure from the more modest 25 bp hikes of the past. The timeline for hikes is more rushed than in 2017 as well. Second, this iteration of QT’s pace is quicker as well, with security maturation caps expected to near $100 billion per month by the end of this year. This seemingly corresponds with the Fed’s balance sheet being just under $9 trillion this time, near double that in 2017. Third, the US economy does not seem to be weathering this transition well, with a 1.5% contraction in Q1 GDP and a sharp drop in value for the US stock market (in part due to supply chain issues, ubiquitous hyperinflation, and volatile geopolitical tensions).
The truth is, we are effectively in uncharted waters, so it is virtually impossible to know what consequences QT (or QE, belatedly) will ultimately have. However, considering our limited experience with it, one of two outcomes seems most likely: 1) QT will have an apparently mild/neutral effect on the US economy, to the point that its shrinking of the money supply is nearly imperceptible for buyers and sellers. Considering its historical correlation with economic growth, there is even a chance it could be seen as a slight bullish fundamental catalyst for the US stock market, a harbinger of the end of hyperinflation risks and woes.
2) Aggressive QT, concomitantly with rapid consecutive 50 bp rate hikes, will contribute to a recipe for recession in the US, encouraging investors to shy away from riskier securities in favor of government bonds, USD, and other safe haven assets. While this scenario seems most likely to me, today’s higher-than-expected NFP numbers showcase a resilient US economy and may have given the Fed more breathing room to pursue this hawkish agenda without recession looming. We will have to patiently keep tabs on other indicators going forward to monitor this.
On Monday, May 23rd, US President Joe Biden unveiled a new trade pact with twelve Indo-Pacific countries called the Indo-Pacific Economic Framework (IPEF). The launching of this deal, coupled with Monday’s news that the Biden administration is considering the merits of rolling back tariffs on imports from China, saw the Dow close nearly 500 points higher on Monday while the DXY fell from 103.04 to 102.04. These significant movements have thus far extended through this week into a 1200+ point rally for the Dow and a drop in DXY below 102, fueled by further news such as a seemingly palatable FOMC agenda and optimistic economic growth predictions from the Congressional Budget Office. With this context in mind, let’s consider what IPEF could mean for US markets.
What We Know
The following countries are the initial partners: Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, Vietnam, and the US. Fiji will now be joining as well. The aggregate economic output of these countries is the equivalent of approximately 40% of the world’s GDP.
Significantly, this deal is not an actual free trade agreement, and thus there will be no traditional trade incentives between the US and its partners, as this would require action from Congress. Rather, the pact is ostensibly built on four ‘pillars’, which are, in no particular order: a) improving supply chains, b) encouraging infrastructure and green energy investment, c) promoting trade, and d) reformulating taxation and anticorruption measures.
What We Don’t Know
As many journalists have pointed out, we have few concrete details to work with just yet. While the broad brush strokes of the deal are sweeping, and could feasibly have all sorts of economic and geopolitical implications, negotiations have yet to deliver any concrete particulars, and thus traders and investors are currently in the dark when it comes to the minutiae and fine print.
While it is not fundamentally a free trade agreement or a trade bloc, it is not yet clear to what extent it could end up resembling one, or to what degree it could mirror the eventually ill-fated US involvement in the Trans-Pacific Partnership. It is also unclear how, if at all, the new agreement will compete with the Regional Comprehensive Economic Partnership (RCEP), a set of free trade agreements that have formed the largest trade bloc in the world, which includes most of the countries involved in the IPEF, as well as China and others.
Possible Market Outcomes
While it is too early to know what long-term effects the currently amorphous IPEF will have on US markets, it’s launching appears to have been a bullish fundamental catalyst for the stock market this week, and a bearish catalyst for the DXY. Rather than making any judgments about its consequences in these early stages, the wiser move would be for traders to keep their eye on the pact as it evolves over time, as it may be ripe with future fundamental catalysts.
However, it seems probable that the long-term outcome of IPEF will fall between two general possibilities: either 1) the deal could pan out to be relatively fruitless and toothless, and have little to no real impact on trade, foreign investment, and GDP growth expectations in the US. In that case, there would be little new to report on in terms of fundamentals and corresponding market volatility. Or, 2) the deal could gain traction and yield results somewhat comparable to a free trade agreement. Historically, this can entail increased GDP growth expectations, increased job outsourcing, increased trade deficits, and other conditions in the US that are relatively bullish for the stock market and bearish for the DXY, government bonds, and other safe haven assets. To what extent either of these transpire, we will have to wait and see.
Major USD pairs opened lower before immediately pairing losses from the lows today. Europe placed harsh restrictions on trade with Russia, and it is clearly affecting the global market. We are taking a look at a couple pairs' strange activity after sanctions and potential trade setups that go with them.
Sanctions by European governments have caused the ruble (Russian currency) to plunge amidst these restrictions placed on them. As a result, US stocks have risen, UK stocks have fallen, German stocks are up, USD is mostly down, and risk-on has returned for the most part.
Bond yields in the US are off the highs today as well suggesting that risk appetite is back. There is still uncertainty everywhere which makes risky plays questionable. However, if you were to be in the stock market or short USD today, you would have positive equity.
This pair gapped lower before immediately shooting higher back above support on the 1D. Major currencies are starting to look stronger than the USD right now which is concerning given the current circumstances.
The kiwi jumped today after falling to support on the 1D. A weaker dollar today brought back a lot of risk-on sentiment in the forex market. The pair might come up to test the resistance level around 0.68637.
The euro is doing the same thing on the same timeframe as it made a lower low gapping downward before buyers stepped back in. This is causing some bullishness for the time being, but this behavior is also concerning.
These jumps in price could be a trap for the retail investor as there is still weak momentum overall after risk-on behavior returned. I would wait to see what happens this week before making any big bets against the USD or going long on the stock market.
US and UK indices are back on the rise again after a stark decline from the highs on inflation, interest rate and Russian-Ukraine concerns. After the news of the invasion, equities went from heavy bearish sentiment to bull mode. Is this recent move an indicator that indices are a buy again, or is this a trap for more downside?
Stocks rise on an increase in personal spending in the US, and after the news of the Russian invasion of Ukraine. It seemed that investors might have been treating this as a sell-the-rumor-buy-the-news event as if the invasion was already priced into the market.
A quick momentum shift in the market caused a crazy surge in demand for tech stocks which have been selling off heavily until recently. Big name tech stocks like Square (SQ), AMZN, GOOG, etc. are beating earnings and showing strong growth.
As we approach the end of this month, we have to start looking towards the Fed meeting in early March. It is very likely that we will see a 25bp hike at the least, and interest rates may continue to rise throughout the year. Inflation is also a serious concern for the stock market and USD as we hit highest CPI levels since the 1980s.
SPX500 found support on what seemed to be a sell-the-rumor-buy-the-news behavior by investors on the Russian invasion of Ukraine. One thing to look out for is this falling trend line where there could be potential resistance. Lower lows and highs suggests that momentum is still bearish for the time being.
UK100 looks in better shape than the SPX as the index makes higher highs and lows on the 1D. The market bounced right off the 200 DMA for the third time since September 2021 suggesting that this level is a reliable zone of support.
Fed Chairman, Jerome Powell, is giving his testimony today and has already mentioned a few things. One, that tapering is confirmed to end in March, and that interest rates will likely rise later this year. The Fed still plans to adjust their monetary policy throughout the year as the recent Omicron surge pans out and uncertainty lingers in investors minds.
The Chairman also stated that the recovery has been impressive thus far and the banking system in continuing to look stronger. We can likely see better earnings throughout the year to, and this could be a major driver for the market in value companies as well as growth.
COT data also suggests a move higher as interest is gaining across the board and futures contracts are being picked up. Retail is also trying to get in on the action as investors are now 99% long on the NAS100 tech stock index. The S&P and US30 are trailing NASDAQ's gains, but are up overall for the day.
On a technical scale, if price on the indices closes with the bullish hammer they have now, we could likely expect another test at the highs. That is about a 2% move for the SPX500 and a 5% move on the NAS100. It's tough to say how long this rally will last, and it could even dwindle by the end of today, but it will be important to watch price action on today's candles and see where we end up at the close. So, before you trade do a quick analysis on the charts to see whether or not you feel confident in the potential market moves later this week.
On December 15th the Federal Reserve Board of Governors made a press release detailing their plans to reduce their open market operation purchases in 2022. The central bank also predicts several rate hikes in 2021, and continuing on into 2023. When you combine this with the current overvalued state of the market, there's good reason to believe that we will see a minor correction, or a mostly flat market.
Fed Open Market Operation purchases of bank bonds and other assets of buoyed up the stock market. SPY and Fed assets look like virtually the same line. Running a correlation on SPY and Fed purchases from 1/2/2021 yields an astounding correlation between the two of 0.8537, or 85.37%. We hardly EVER see this much influence by the fed
Rates have an inverse relationship with the market. When rates go up, stocks go down. What we want to know is how much rates will increase and how many hikes there will be. The Fed has indicated that there will be three hikes in 2022.
3. Emerging Markets and Heavy Industry related currencies in South East Asia and Pacific Economies
AUD, NZD will benefit form the gains in emerging markets in South East Asia. This year alone, Vietnam a 34% increase in their largest stock index. Because these are the largest regional speculative currencies in the area, FOREX traders looking to benefit from the gains in emerging economies would do well to consider AUD and NZD pairs.
For questions and comments, you can reach the author at firstname.lastname@example.org or through the A1Trading discord at @smstreb97