July 25, 2023
Markets are priced for a 25bp rate hike and a message that signals a pause in the hiking cycle. The June meeting resulted in a ‘hawkish skip,’ but the softer-than-expected June CPI/PPI reports should give the Fed more comfort to be patient and data dependent. While this scenario is mostly priced into markets, certainty of a pause may generate a small relief rally of 50-100bp. The next most likely scenario would be a 25bp rate hike and a message that signals continued rate hikes. A number of Fed officials have recently endorsed this policy path with market-based probability for a September or November rate hike sitting at 30%. This scenario would likely create 50-120bp of downside in the SPX. Outlier scenarios are both to right of bell curve with a ‘hawkish skip’ and ‘we were done in May’ message resulting in bullish yield curve steepening, weaker dollar, higher commodity prices and higher stock prices.
The S&P 500 (SPX) is currently trading above resistance at 4565, but closing levels matter most. A close above 4567 would lead to accelerated upside momentum to next level resistance near 4790. An afternoon fade would put the index back in consolidation mode with an eye on support at 4325. Earnings, perceived earnings growth and bond yields are what ultimately determine stock prices. Thus far, Q2 earnings season has been supportive of higher prices, while tomorrow’s Fed message may influence bond yields in one direction or the other. A combination of downbeat results from GOOGL and MSFT this afternoon plus a more hawkish Fed tomorrow are near-term catalysts for a pullback.