1. Moving the markets

The much-anticipated Fed announcement came and went. What mattered most to Wall Street traders was that Powell’s announcement was in line with expectations and contained no surprises.

ZeroHedge clarified it this way:

• The Fed statement and economic projections saw the central bank double the pace of its asset purchase tapering to USD 30bln per month (consisting of USD 20bln Treasuries, USD 10bln MBS – this will be doubled again in January, with similar reductions likely be appropriate each month thereafter), which puts it on course to conclude asset purchases by March, from the prior landing zone of around June, although this could be adjusted if warranted.

• Its updated projections now see three rate hikes in 2022, revising up its view from one hike penciled in at the September FOMC (recall that September, the Committee was essentially split on the potential need for a second 2022 rate hike); longer-term, it has left its terminal rate view unchanged, however.

• Inflation forecasts were revised up to 2.6% for headline PCE by the end of next year (prev. 2.2%), while the core measure is seen at 2.7% by end 2022 (prev. 2.3%).

• On the labor market, the Fed sees the jobless rate return to the 3.5%-mark next year (prev. saw 3.8%), where it is likely to stay over its forecast horizon.

The early slump turned into a giant pump propelling the major indexes out of the doldrums, for sure part of a relief rally, as some analysts had expected a much more aggressive Fed announcement.

Personally, I think that this will still be forthcoming next year when inflation will not be contained as hoped and will be surging much higher.

The rebound was broad-based with 9 out of 10 S&P sectors participating, but the US Dollar reversed an early rally and dumped into the close. Gold went the other way by losing momentum early on, after a poor retail sales report, but the precious metal found some footing and ramped higher by 0.38%.

I’ll be out tomorrow but will be writing Friday’s week-ending commentary, with the $4.3 trillion in options expirations surely having an impact on that day’s volatility.

1. Moving the markets

There was simply too much uncertainty swirling around Wall Street to give the bulls any encouragement to pull the major indexes out of yesterday’s doldrums, so the bears dominated the session again.

First, there was Goldman Sachs ringing the alarm bell by stating their worry about market breadth. Zero Hedge noted that it means 51% of all market gains since April have come from just 5 stocks, and only 35% of Nasdaq companies are above their 200-day M/A, with the Nasdaq at all-time highs. Ouch!

Second, traders are nervous about Friday’s quad options expirations, the volume of which is pegged to $4.3 trillion in estimated value. This will certainly add to volatility, as will some other factors.

We will face the outcome of the Fed meeting tomorrow regarding the much-announced acceleration of the tapering of bond purchases, as well as any potential rate hikes. This will be followed by Thursday’s jobless numbers and the above-mentioned options expirations on Friday, all of which could combine to create a tumultuous week.

Given the above, and the fact that bond yields edged higher today, it’s no surprise that equities gave back some of last week’s gains with the Nasdaq and SmallCaps getting hit the hardest.

The US Dollar continued its stairstep rebound and added 0.26% for the session, while the Commodity Index, which had been on a tear since April 2020, showed signs of weakening by breaking below its major uptrend line.  

Even gold, a place to hide during times of uncertainty, offered no refuge, and the precious metal was slammed at the tune of 0.93%.

1. Moving the markets

Despite the futures markets showing solid gains across the board last night, a sense of reality returned this morning, with all indexes opening to the downside.

A mid-day rebound ended in disappointment, as the bears asserted some strength and pushed the major indexes towards their lows of the session. However, this really comes as no surprise considering that the S&P 500 merely retreated from its record high set on Friday.

Adding to the uncertainty were continued jitters about the omicron variant and its potential economic impact, despite a host of scientists and physicians playing down its severity, but MSM is staunchly focused on fearmongering.

Also on traders’ minds is the outcome of the Fed’s two-day meeting to be released on Wednesday, with the main topics being the possible acceleration to end the bond-buying program, along with any thoughts of interest rate hikes. The Fed must handle both events with kid gloves and tread lightly, otherwise investors might be spooked and hand the baton to the bearish crowd.

Last week’s massive short-squeeze, which peaked on Wednesday, ran into a brick wall and gave up all gains, with the underlying shorted stocks now doing what they are supposed to, namely drop.   

Bonds rallied as yields dropped, and the US Dollar recaptured Friday’s losses in one swoop. Gold mainly bounced above its trendline yet only managed to score a meager gain of 0.17%.

All eyes are now on Wednesday’s Federal Reserve policy decision.