NYSE MAC Desk

Fed Recap:

   
   
   
STRAIGHT FROM THE TRADING FLOOR
by Michael Reinking, Sr. Market Strategist
May 4, 2022 6:00 PM ET
DOW 34,061  (+932), S&P 500 4,300  (+125), Russell 2000 1,949 (+51), NYSE FANG+ 5,705  (+187 ), ICE Brent Crude $110.22 /barrel (+5.25 ), Gold $1,884 /oz (+14.80),Bitcoin ~39.9k (+2k)
  MAC Desk Commentary:
Today’s Fed meeting was highly anticipated. I’ll make sure not to bury the lede and say that today’s statement and the press conference that followed were more dovish than the very hawkish assumptions that markets have been pricing in. The statement acknowledged that economic data “edged down” in Q1. In addition, China lockdowns were added to Ukraine as a risk factor. There was no change to the language about the path of rates, sticking with “ongoing increases”.  There had been some speculation this would get more aggressive. There were also no dissenters on the Committee. The official balance sheet reduction announcement was also made, and this too carried a somewhat dovish stance. The initial runoff is set to occur at half of the max caps that were laid out in the Minutes last month. Starting at $30B of Treasuries and $17.5B of MBS on June 1 for three months. This will then be adjusted to the max caps of $60B/$35B going forward. Equity markets pulled back modestly following the release with the S&P retesting the intraday lows while rates also started to tick a bit lower. However, the real fireworks were yet to come.
 
In an interesting start, Chair Powell began his press conference by addressing the American people vowing to bring inflation down. The Chairman acknowledged this has continued to outrun their forecasts and had spread beyond goods. Like the statement, he highlighted that both Ukraine/China were creating additional upside inflation and economic risks. Once again, he used the word “expeditiously” describing the pace of interest rate moves to a more normal level. In his prepared remarks, he said given the environment the committee is prepared to be “nimble” with regards to incoming data and would strive to avoid adding to the uncertainty. The seminal moment during the press conference was his second question which came from Steve Liesman of CNBC, who asked about the pace of future rate increases. Chair Powell outright said that “a 75bps rate increase was not something that the committee was actively considering” and said that “there is a broad sense on the committee that additional 50bps increases should be on the table for the next couple meetings” . As we highlighted earlier, this was in staunch opposition to what markets were pricing in, as futures had an implied probability of a 75bps rate increase at the June meeting. This caused yields to fall sharply especially at the front end of the curve with 2yr dropping a very quick 15bps. He highlighted that the recent data suggested that core inflation had peaked, but this was not providing any comfort and that they would want to see evidence that this was moving lower before they would look to adjust their stance. Throughout the Q&A he reiterated that the economy was strong and could absorb tighter monetary policy and said “we have a good chance for a soft or softish landing” - which wasn’t delivered with a lot of confidence. The other somewhat dovish takeaway was that when discussing the balance sheet, he did say that the MBS maturities would not meet the caps, but did not go as far as suggesting outright sales.
 
The move lower in rates and relief regarding a 75bps increase sent shockwaves through financial markets. As we’ve highlighted throughout the week, with sentiment as negative as it has been and with markets already pricing in very aggressive action by the Federal Reserve, the risk was to the upside. The S&P 500 took out the 4,200 level, discussed earlier and quickly traded in a straight line up to 4,300, which was the first logical area of resistance. The VIX broke ended the day ~25.50 after breaking the 28 level. The gains in equity markets were broad based but the biggest beneficiaries were the tech/growth stocks which have underperformed. This was very similar to the action that we saw during the sharp rally in mid-March. The US dollar index moved sharply lower trading down ~1%, back to $102.50. This helped commodities rally as well. As the risk on sentiment took hold Bitcoin futures tacked on an additional ~1k points quickly approaching 40k, a 7% reversal from yesterday’s low.
 
In my opinion the size of the moves were more a function of positioning coming into this event rather than any real shift in policy. I get the sense that the Fed wants to move forward with its current path and see how this effects the economy. Keep in mind this is the first time we have seen a 50bps rate increase in over 20yrs, with multiple more to come, along with the balance sheet runoff, so in the scheme of things this is still pretty aggressive. Now we’ll see if the data cooperates. Friday’s employment report and CPI next Wednesday are the next two hurdles. Keep in mind Chinese markets re-open tonight and there is a BOE rate decision tomorrow morning. And most importantly it is Cinco De Mayo, which we will happily celebrate with Constellation Brands at the Closing Bell!
 
Technicals/Sectors:
Comments from the Mid-Day - On Monday we discussed some of the positioning dynamics suggesting we could see a sell the rumor buy the news response. We have seen >3% bounce from Monday’s lows leading into the event. With a break above 4,200 we could see the S&P squeeze higher. There is no real identifiable resistance for a couple %. We have been watching ~4,275 for months as a key inflection point. Last week’s high is ~4,300 while the declining 20d will be an area to watch (~4,335 delta ~-15pts/day). A break below 28 on the VIX will add fuel to the fire.


Post meeting
Given the rally right up to the first area of resistance just wanted to highlight the next levels to watch which are the 50d ~4,375 which also coincides with the level we broke down from the day Powell presented to the IMF. This has quickly worked off oversold conditions, but the VIX remains in the mid-20’s which suggests there could be further upside in the short-term. If that is to play out we’ll want to see the market hold in the upper third of today’s range.
 
In the bigger picture the broader topping/range patterns remain intact. By the way this type of trading environment is difficult to navigate from a portfolio perspective and can lead to a lot of frustration.
 

 

 
A continued pullback in US Dollar index would be supportive of higher equity prices. Watch the rising 20d ~$101.36 as first potential target.


 
Index Today WTD YTD
S&P 500 3.0% 4.1% -9.8%
Dow 2.8% 3.3% -6.3%
Russell 2K 2.7% 4.6% -13.2%
NYSE FANG + 3.4% 6.7% -23.1%
 
Sectors Today WTD YTD
S&P 500 / Energy -SEC 4.1% 8.6% 47.0%
S&P 500 / Communication Services -SEC 3.7% 6.8% -21.0%
S&P 500 / Information Technology -SEC 3.5% 5.3% -14.6%
S&P 500 / Materials -SEC 3.2% 4.1% -2.5%
S&P 500 / Financials -SEC 3.0% 4.3% -7.9%
S&P 500 / Industrials -SEC 2.9% 3.8% -6.7%
S&P 500 / Consumer Discretionary -SEC 2.9% 3.9% -17.9%
S&P 500 / Utilities -SEC 2.2% 1.5% 1.0%
S&P 500 / Health Care -SEC 2.2% 1.8% -5.9%
S&P 500 / Consumer Staples -SEC 2.2% 0.6% 1.3%
S&P 500 / Real Estate - SEC 1.1% -0.3% -10.5%
AVERAGE 2.8% 3.7% -3.4%
 
Other Asset Classes:
  • Government Yields -
    • 2yr -14bps to 2.65%, 5yr -11bps to 2.92%,  10yr -4bps at 2.92%, 30yr unch at 3.00%
  • USD index: -$0.96 to $102.53
  • Oil prices - ICE Brent: +5% to $110.22, WTI:+5% to $107.56, Nat gas +4.8% to $8.35
  • Gold: +0.8% to $1,883, Silver: 2.7% to $23.00, Copper: +0.8% to $4.37
  • VIX: -3.83 to 25.42
  • Bitcoin: +5.6% to ~39.8k
 
Have a great night!

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