1. Moving the markets

Only thing mattered today, and that was the announcement by the Fed on interest rates. Traders and algos alike engaged in the usual front running, and today they were not disappointed, as the Fed did not surprise with an unexpected hike of 1% but satisfied expectations of 0.75 increase.

Late in the session, markets were even more encouraged after Fed head Powell left the door open, about the size of the Central Bank’s rate move at the next meeting in September, while noting that he would eventually slow down the magnitude of future rate hikes:

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.”

That was music to the ears of traders and upward momentum accelerated making this a celebratory day for the bulls, especially after Powell opined that, against all evidence, he does not think the U.S economy is currently in a recession. He also added that he “takes the first estimate for Q2 GDP (due out tomorrow) with a grain of salt.”

Hmm, that goes along with his insistence during 2021 that inflation is “transitory.” Rate hike expectations tumbled—at least for today when “bad news was good news” again.”

Be that as it may, ZeroHedge noted that the largest buy program since March 2021 contributed to today’s Ramp-A-Thon, most likely due to Powell’s indication of slowing the pace of hikes in the nebulous future.

Short-term Bond yields plunged, as the US Dollar was spanked, and gold rallied.

The issue remains whether the Fed will really pivot to lower rates as the markets now expect, which would be seen as “green light” or an “all clear” for equities. Strategist Ajay Rajadhyaksha at Barclays called it this way:

Policy officials would try to avoid the mistake they made in April. That month, central bankers talked down the size of rate hikes that would be ultimately needed, prompting bond traders to question the Fed’s commitment to its inflation target. Treasury yields spiked, spurring losses across assets. The S&P 500 dropped almost 9% for the worst month since the pandemic crash.

He then concluded:

The Fed has seen what happens when it prematurely declares victory over inflation and is unlikely to repeat that mistake.

Stocks and bonds are both hoping that the Fed will pivot away from its commitment to overtightening. It’s a hope that is likely to be dashed this week.

While today was a “feel good” session, it remains to be seen whether this turns out to be just another head fake.  

1. Moving the markets

After the close yesterday, Walmart came out and cut its earnings forecast, which pulled all retailers lower in the afterhours trading session, as fears mounted that consumer spending, or rather the lack thereof, will now not be the driver to keep the U.S. out of a recession.

That sour mood carried into today’s red opening and worsened as the day went on with the major indexes closing broadly lower. The effect was that earnings expectations have been tempered with comments being of a cautionary nature, as the true effect of inflation has still to be recognized on a corporate level.

Markets received no directional help, because the always reliable short squeeze was conspicuously absent, as plunging New Home Sales, sagging of homebuilder confidence and record low affordability made their presence felt.   

Bond yields rose moderately, the US Dollar bounced, while gold slipped a tad but held on to its $1,700 level. Natural Gas surged to 14-year highs, but Crude Oil slipped back towards the $95 level.   

As I am writing this afterhours, Microsoft just released its quarterly report card, which showed top- and bottom-line misses. The stock is currently down some 5%, which may not bode well for Wednesday’s opening.  

Tomorrow, however, the Fed’s announcement on interest rates will determine market direction.

1. Moving the markets

The major indexes fluttered throughout the session with no clear direction, because traders prepared themselves for the big events later this week. The next 4 trading days will be the busiest, as about one third of the S&P 500 members are scheduled to release their earnings reports.

The Fed will be on deck Wednesday with the world watching its decision on interest rates, or more specifically whether they will hike 75 or 100 bps. As important will be their outlook as to whether a moderate tone towards future hikes will prevail.

To top it off, Thursday’s GDP report will likely show a second consecutive quarter of declines, which means we will have officially entered recession territory, no matter how much the current administration is trying to move the goalposts via a new definition of what a recession is. For clarity, ZeroHedge posted this tongue in cheek comparison.

Bond yields rose moderately, but the 10-year remained below its psychologically important 3% level. The US Dollar dipped, as did gold, but Crude Oil bucked the trend, edged higher yet stayed below its $100 threshold.   

It promises to be a weak where anything is possible in terms of market direction.