SPX500 Extends its Post-Fed Slide as the BoJ Surprises Markets

SPX500 Analysis

The US Federal Reserve slowed the pace of tightening last week, with a 50 basis points rate hike, but was defiant against any policy easing. It maintained guidance for “ongoing increases”, with Chair Powell stressed that the bank is “not on a sufficiently restrictive policy stance yet”.

More to it, officials upgraded their view on the appropriate policy path, now expecting interest rates to peak at a median of 5.1%. This is a hefty bump, form the previous 4.6% projection and implies another 75 basis points of hikes.

This sent Wall Street to another losing week despite the initial underwhelming reaction, while SPX500 faces further pressure, as the bank of Japan caught markets off-guard with today’s policy tweak. In stark contrast with its major peers, the BoJ is on the far dovish side of the policy spectrum, but has now widened the range of the yield curve control to around 0.5%, from around 0.25%.

This change opens the door to the normalization of the uber-dovish strategy and can have broader market impact, since it could lead to a repatriation of funds that would hurt global equities.

This is an unfavorable environment for SPX500, which is now exposed to the 3,696 support, although October two-year lows (3,501-3,491) appear distant at this stage.

On the other hand, markets are not convinced that the fed will raise rates by as much as its updated projections suggest. CME’s FedWatch Tool assigning the highest probability to a terminal rate of 5.0% and sees rate cuts in the second-half of 2023.

Furthermore, the decline of SPX500 looks overextended and a recovery effort from current levels would not be surprising. However, a significant I improvement in sentiment will be required for daily closes the EMA200 (3,900-30), that would shift bias to the upside.

Markets will now turn to the PCE inflation update on Friday and the final Q3 GDP a day earlier.