Today is bigger than any typical Fed Day, it is Decision Day. Will the central bank play the Grinch That Stole the Christmas Rally, asks Bill Baruch President of BlueLineFutures.com?
The committee is expected to increase the pace in which they are tapering monthly asset purchases from $15 billion to $30 billion. On November 3, they announced the highly anticipated taper and bubble wrapped it as dovish as possible. We characterized it as a net-zero taper; per month, they planned to purchase $10 billion less in Treasuries and $5 billion less in mortgage-backed securities. Coincidentally, the same day, the US Treasury announced it will decrease issuance by $15 billion per month for approximately the next three months, and potentially more thereafter. Needless to say, risk assets welcomed the coordinated move, and the Federal Reserve successfully landed the taper.
But was it enough? Fed Chair Powell certainly did not think so. Nearly a month later, in his prepared remarks to Congress, he retired the word “transitory” in describing the rise in inflation and said the bank will look to speed up its pace of taper. Markets have raced to discount the move with tech stocks underperforming due to the expected rise in rates and hawkish scholars coming out of the woodwork to applaud the move. Extremists are calling for 200 basis points of hikes next year.
The days leading up to a meeting can become cloudy due to opinions ping-ponging across media outlets. At the end of the day, the Fed has still added more than $200 billion in liquidity since the end of Q3. Furthermore, even if they whittle down the $90 billion per month they are still purchasing at the onset of 2022; at a pace of $30 billion per month, they will add nearly another $200 billion to their balance sheet in Q1. Remember, all the while the Treasury plans to issue less, and potentially even less after March!
In our opinion, markets have priced in the headline impact of this speedier taper. Yes, less liquidity may cause added volatility at times. What really matters today is the pace of hikes. Fed Chair Powell has soothed markets in recent months by disconnecting the taper from rate hikes. However, markets are not buying it and have priced in a 57.3% probability the Fed hikes in May. We will say that Omicron does bring a layer of uncertainty that rightfully should erode some of the recent hawkishness, and that although inflation is at 30-year highs, it is not running faster than anticipated. This is a quarterly meeting, meaning we get projections and that famous Dot Plot. Remember, the Fed’s Dot Plot is worthless and has never been accurate, but markets will digest it like praise from a priest. Right now, the market is pricing in a 60% probability the Fed gets a third hike in December of next year. Economists surveyed by Bloomberg said they expect two hikes next year. Relative to those two projections, it matters where the dots fall and how Fed Chair Powell lands it in his press conference.
E-mini S&P (March) / NQ (March)
S&P 500 (SPX), yesterday’s close: Settled at 4628, down 31.50
E-Mini Nasdaq-100 Futures (NQ), yesterday’s close: Settled at 15,922.25, down 159.25
Fundamentals: Please read about Fed Decision Day above. On today’s the economic calendar, a slate of data from China last night was mixed but headlined by Industrial Production beating expectations. However, there are fears Beijing slows industrial output and thus their demand for materials heading into the Winter Olympics. The Hang Seng finished down by 0.91%. From the US, retail sales came in below expectations and NY Empire State Manufacturing beat.
Technicals: Price action is trying to stabilize from yesterday’s heavy selling that took place through noon CT. Rally attempts have not broken above any significant resistance; settlements from Monday are aligning to bring major three-star resistance in each the S&P and NQ. We must see a move out above 4659.50-4661 and 16,081-16,097 in order to neutralize the latest selling. The S&P responded to major three-star support aligning with the 50% retracement from the recent record high back to the September/October lows. The NQ stabilized at the December third weekly settlement and is trying to hold above previously strong resistance, aligning near the 50-day moving average, at 15,847-15,886. If the NQ can hold action above here and the S&P can hold above its pivot, aligning with our momentum indicator.
Crude Oil (January)
Yesterday’s close: Settled at 70.73, down 0.56
Fundamentals: Please read about Fed Decision Day above, there will be a broad impact on risk assets. As for crude oil specifically, today brings weekly inventory data. There was a one-two punch late yesterday due to the private API survey being headline negative and a rise of virus cases in China. Last night, although Industrial Production data from China beat expectations, fixed asset investment and retail sales missed. Also, Beijing is likely to curtail industrial output through the Olympics and this has begun to weigh on sentiment along with the rise in cases. Expectations for today’s inventory data due at 9:30 am CT are -2.082 mb crude, +1.606 mb gasoline, and +0.688 mb distillates. Also, January options expire today, and it is no coincidence seeing price action at and around the $70 mark.
Technicals: Despite the recent wave of weakness, price action his holding good construction into strong support. Last week, we cited the possibility of a pull back from major three-star resistance at $73 to potentially test into these strong levels of support. What matters is how they are received and so far, so good. The overnight low of 69.39 has continued to hold our first layer of major three-star support.
Gold, yesterday’s close: Settled 1772.3, down 16.0
Silver, yesterday’s close: Settled at 21.924, down 0.404
Fundamentals: Please read about Fed Decision Day above. At the end of the day, a more hawkish Federal Reserve than what we described as being priced in, will weigh on gold and silver. US dollar strength coming out of today’s meeting will likely be at the direct expense of the metals. Gold and silver are trying to dig themselves out of the overnight lows, using a weak retail sales read to help buoy the tape. They both remain in a ‘wait and see’ mode heading into the decision at 1:00 pm CT and Fed Chair Powell’s presser to start 30 minutes after.
Technicals: Price action in gold has again responded to rare major four-star support at 1757-1766, but to the most minimal degree thus far. Like we said above, it all comes down to the 1:00 pm CT Fed policy narrative. Until then, our pivots will act as a point of balance.
Learn more about Bill Baruch at Blue Line Futures.