Market Looking for a Dovish Stance from the FOMC Wednesday

Market Looking for a Dovish Stance from the FOMC Wednesday

$DIA, $SPY, $QQQ, $RUTX, $VXX

The market is looking for a Dovish stance from the FOMC when it comes to its interest rate projections for Y 2019.  Everything will come into view at 2:00p EST Wednesday

Investors in pain from a difficult year hope the Fed will align with President Trump’s ‘demand’ for dovishness in Y 2019.

Odds are that Fed Chairman Powell will announce a 1/4 pt rate increase Wednesday, but it’s what comes next that has Wall Street’s focus. As President Trump has backed him into a corner.

The Big QsWill officials execute a “dovish hike,” signaling a slowdown in the pace of future increases? Will they remove the phrase “further gradual” hikes, indicating a flat-out pause? Will Chairman Powell address political pressure from the White House? 

The Big A: The line the Fed must walk is thin, as it is taking out $50-B a month of liquidity, that no one talks about.

Investors are preparing to respond in the following way:

Equities:The Fed may have the toughest time appeasing equity investors. The S&P 500 has plunged almost 10% since the Fed’s last meeting and closed Monday at the lowest level of the year; weakness rarely seen ahead of interest-rate hike.

A dovish Fed that indicates an end to pre-ordained hikes and a switch to more dependence on economic data would go a long way to allaying concerns that the it will tighten the economy into a slowdown.

But a too-dovish Fed could raise the specter of an economic slowdown and spook stocks into a Bear market.

Bonds: Bond traders will focus their attention on the plot of dots that indicate officials’ expectations for future rate levels. Policy-makers projected 3 increases next year when they last laid out their views in September. There has been a violent repricing in the months since, sending the yield curve to its 1st inversion in over a decade. Albeit with no recession in sight.

Traders want a tailored message; dovish, but not too pessimistic, that means lowering expectations to 2 hikes from 3.

Forex: Fx expectations for a dovish Fed should benefit USD Bulls. And even with USD near its Y 2018 highs, Bears have little reason to expect any impetus from Wednesday’s decision.

It hard for this FoMC meeting to ‘out-dove’ market expectations. To do this, the Fed basically needs to not hike. USD’s bias is to strengthen rather than weaken, given how dovish market expectations are now.

Hedge funds and other large speculators seem to agree. Bullish USD bets are close to the highest level since January 2017, according to the latest Commodity Futures Trading Commission (CFTC) data.

Tuesday, the major US stock market indexes finished at: DJIA +82.66 at 23675.64, NAS Comp +30.18 at 6783.91, S&P 500 +0.22 at 2546.16

Volume: Trade on the NYSE came in at 1.1-B/shares exchanged 

  • NAS Comp -1.7% YTD
  • DJIA -4.2% YTD
  • S&P 500 -4.8% YTD
  • Russell 2000 -10.3% YTD

HeffX-LTN’s Technical outlook for the US major stock market indexed is Bearish to Neutral in here.

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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