Stocks rebounded today following yesterday’s steep selloff. The Dow, S&P, and Nasdaq Composite all gained as the market headed for its best month since January 2019. Strong earnings from General Motors (NYSE: GM) and Exxon Mobil (NYSE: XOM) helped lift shares after both companies “beat” on EPS and guidance.
The Fed’s latest policy meeting got started this morning and wraps up tomorrow afternoon. Fed Chairman Jerome Powell is expected to unveil a 25 basis point rate hike at its conclusion. Wall Street doesn’t anticipate any surprises with the rate hike itself but remains concerned about Powell’s post-hike press conference.
The Fed has fallen into a pattern of dovish hikes followed by hawkish Powell pressers. Will investors see another one tomorrow? JPMorgan’s Andrew Tyler says yes.
“While we are unlikely to see much surprise to the post-meeting statement, Powell’s press conference would be the key focus. With disinflation and Fed pause after March’s meeting becoming a consensus view, financial condition has been eased to Feb 2022 level where 30yr Mortgage rate was 220bp lower than current level (6.4%). To push back against easing of financial condition, Powell’s speech will likely to be hawkish: Feroli thinks that Powell would address (i) a downshifting to a 25bp hike does not imply a pause and (ii) no cuts in 2023 to guide the market expectation,” wrote Tyler this morning in a note to clients.
“With Powell’s hawkish conference meeting becoming a consensus view, the impacts of Fed days have been less significant. Since October, the expected terminal rate has been stabilized around 5% via guidance from Fedspeak. As we are approaching the end of Fed’s tightening cycle, unless Powell announces a surprising Fed pivot, market expectation for terminal rate will remain stable.”
In other words, Tyler believes that stocks won’t react to Powell’s press conference as the market almost unilaterally expects a hawkish tone.
But extremely low market liquidity could lead to a major move tomorrow regardless of how priced-in a hawkish Powell speech is.
“S&P top of book liquidity touched $3mm yesterday which is a [year to date] low. Not hard to move this tape around,” wrote Goldman Sachs strategist Michael Nocerino.
In addition to the FOMC tomorrow, the Bank of England and European Central Banks conclude meetings on Thursday. Meta (NASDAQ: META) reports earnings tomorrow after the close and the rest of Big Tech (GOOGL, AAPL, AMZN) reports Thursday. Friday, the jobs report comes out.
With market liquidity so low, investors are likely to experience fierce intraday swings in response to this week’s major announcements. And it all starts at 2 pm EST tomorrow when the Fed announces its next rate hike.
Until then, expect markets to remain coiled.
