Stocks slipped this morning as the market geared up for the Fed’s next rate hike, due out at 2 pm EST. The Dow, S&P, and Nasdaq Composite all endured moderate losses through noon following yesterday’s major rally into the close.
And though the market was down this morning, bulls still have much to be happy about. The S&P just enjoyed its best January since 2019. Sentiment, following a several-week-long short squeeze, has improved dramatically, too.
Goldman Sachs and JPMorgan analysts admitted yesterday that neither bank expected a rally of this magnitude. JPMorgan strategists then added in an acronym-laden commentary that the good times could continue even if Powell delivers a hawkish post-FOMC speech today.
“Despite recent Fespeaks all [supporting] holding [the] terminal rate at 5% for the entire year, the [overnight index swaps] market currently expects the [federal funds rate] to be around 4.5% by [year’s end], implying a 50 bp cut in 2H23,” the note read.
“Will tomorrow’s meeting reshape this expectation?” the bank’s analysts asked, before reiterating JPMorgan strategist Michael Feroli’s prediction from yesterday morning.
“Feroli expects Powell’s speech to remain hawkish to push back against the easing financial conditions, but given this consensus view, any pivot from the view of holding [the federal funds rate] at 5% till [year’s end] could be enough to lead to a market rally.”
In other words, Feroli believes that if Powell matches the consensus estimate – a 25 basis point hike and hawkish press conference – the market shouldn’t sell off dramatically.
Even a neutral press conference could spark a rally according to the JPMorgan analyst.
The last few hikes saw stocks surge immediately in response to each rate increase. Then, when Powell started to speak, the market sold off.
Will investors be treated to a repeat performance today? It certainly seems that way. Feroli thinks the market won’t care all that much if Powell stays hawkish in his press conference, but I’d wager that’s an unlikely outcome due to how overbought stocks currently are.
Not only that, but if Powell tries to kill the narrative that the Fed’s about to cut rates this year, the ensuing bond market chaos could drag stocks lower all on their own.
Bond king and DoubleLine cofounder Jeffrey Gundlach agrees, saying this morning that the Fed “will push back against the pivot narrative and thereby current bond market pricing” in a tweet.
“Should be interesting,” he concluded.
And it will be. Investors will want to pay more attention to Powell’s press conference (vs. the hike itself) as a result, which has the potential to finally end the bear market rally if it’s clear that Powell is “anti-pivot.”
