Fed Guidance Primary Focus
With a fresh 8-day low yesterday posted in the face of mixed/slightly soft US data, fear of the Fed action today has been factored again. Obviously, today’s forward guidance from the Fed is the primary focus with recent market probabilities pegging a 25-basis point rate hike today over 99%. While the CME Fed watch tool pegs the potential for a rate hike in the next meeting at 79%, we think that expectation is higher than reality in the actual trade. According to CNBC reporting, yesterday’s 5 year note auction yielded a B-reading but we suspect the trade was tentative in their activities because of today’s uncertainty. On the other hand, the Fed has hiked interest rates in 11 of the last 12 meetings and signs of softening inflation have been clearly documented recently. The fear of a US recession has receded consistently which many view as a signal that rates will continue to return to normal historical levels and in turn catch up with the leap higher in the US Fed funds rate. Keep in mind, a large portion of the trade has seen the inverted yield curve as a sign of recession and therefore that relationship is set to reverse! The US trade will be presented with another wave of housing/real estate related data today with expectations predicting a slight dip in new home sales last month. The North American session will start out with a weekly private survey of mortgage applications followed by June new home sales which are expected to have a modest downtick from May’s 763,000 annualized rate. The highlight for global markets will come during early afternoon US trading hours with the results of the latest Federal Open Market Committee meeting. While a 25-basis point rate hike is widely expected, the FOMC’s post-meeting statement and press conference by Fed Chair Powell will be heavily scrutinized for clues on upcoming Fed policy moves.
STOCK INDEX FUTURES
Global equity markets overnight were lower except for the Australian market which benefited from reduced Australian interest rate hike concerns. The S&P has extended its recently gained leadership role and the bull camp appears to be capable of discounting today’s widely anticipated rate hike. We also think favorable earnings from Alphabet yesterday provides a measure of fresh bullish confidence which countervails recent negative big tech headlines. However, the markets continue to see headwinds from increased competition among big tech companies which have started to cannibalize revenues in pre-existing and new revenue sources. Fortunately for the bull camp UPS has avoided a strike and hopes “remain eternal” for news of a Fed pause later today. Today will be a busy day of earnings announcements will include Coca-Cola, Thermo Fisher Scientific, Union Pacific, Boeing, AT&T, ADP, and CME Group before the Wall Street opening while Meta Platforms (Facebook), ServiceNow and Lam Research report after the close.
The S&P continues to discount negatives and embrace positives with fear of recession receding and fear of significant additional rate hikes dissipating. However, the markets have embraced bullish prospects aggressively throughout this month and today will bring an avalanche of critical corporate earnings which are likely to set the tone early. Fortunately for the bull camp the Dow index has backed off from yesterday’s highs with a setback of 190 points reducing the potential magnitude of “sell the fact” action from today’s Fed meeting.
DOLLAR: With the dollar showing signs of weakness from profit-taking and the market’s entrenched views of a Fed pause signal today, further declines could represent a buying opportunity. However, early US scheduled data is likely to facilitate further declines with a measure of “sell the rumor” adding to the morning weakness. Initial buying support in the September dollar is seen at 100.62 with stops on fresh longs best placed below 100.44.
EURO: As in the dollar coverage today, we see counter trend action in the early trade with euro short covering resulting in a hard-fought limited rally to 1.1123. However, weak German data yesterday and guilt by association from a soft Swiss expectations survey overnight should discourage sustained buying of the euro today. In other words, we see the euro registering speculative buying off short-term trading activity and expect the 2nd half of July selloff to resume.
YEN: The Yen is benefiting from a balancing ahead of today’s Fed decision and to a lesser degree from a better-than-expected Japanese coincident index reading for May released overnight. Certainly, the Yen could see further short covering if the Fed offers clear dovish prospects for the future as that could allow for a return to resistance at 72.19. However, we think the trade is wrong in expecting clear pause direction from the US Fed today.
SWISS: As indicated already, a position balancing reaction is underway in the currency trade with the Swiss short covering justified from a compacted slide from last week’s high of 205 points. In fact, the Swiss has virtually exploded from the early July lows which suggests the trade largely expects the Fed to offer clear dovish guidance. Holding back the Swiss is a -32.6 Swiss ZEW expectations survey for July which suggests the bull camp in the Swiss is heavily reliant on the dollar resuming the early July slide later today.
POUND: We see the Pound separating itself from other nondollar currencies after today’s Fed meeting. However, the initial reaction to the Fed result today could throw the Pound back to uptrend channel support of 1.2813.
CANADIAN DOLLAR: While we see the Canadian ultimately remaining in the last 3 weeks sideways chop pattern, political uncertainty from leadership changes in the Canadian government and fear of a volatility reaction to the US Fed meeting should leave the bear camp with an edge and in turn targeting of 75.60.
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