US equity benchmarks finished strongly after the Federal Reserve hiked rates by 50-basis points and announced the start of quantitative tightening to begin next month, states Bill Baruch, president of BlueLineFutures.com
Ultimately, the policy announcement and Fed Chair Powell’s press conference could not have played out more perfectly within our narrative. Powell placed a ceiling on the committee’s hawkishness by saying a 75-basis point hike was not on the table, forcing markets to quickly recalibrate the path of rates; stocks and commodities rallied, whereas the US Dollar and rates backed off.
This was right in line with what we spoke of Wednesday: "Prices of many assets have come in over the last two months and there are inflationary tailwinds the Fed cannot control. Furthermore, since the committee has been patient, they are likely to remain patient."
It is our belief that market participants found themselves so deep in the woods on the inflation narrative, they cannot see the trees; when the magazine covers are printed, it has usually gone too far. This caused many to be offsides from current levels in fear of a hawkish surprise. Powell also emphasized the health of the economy in the face of the Q1 GDP blip and markets found it all soothing. As we embark on a new trading day, we must not overlook the volatile environment we find ourselves and yesterday’s momentum hold.
The Bank of England hiked rates by an expected 25 basis points yesterday. However, the British Pound is getting trucked and trading at the lowest level since July 2022. Many committee members saw the risks of inflation to be more balanced and prefer to be patient as economic expectations recede. Sound familiar? The move has underpinned the US Dollar (DX-Y), helping it regain broad strength versus the Euro (EUR/USD) and Yen (6J=F). Will this throw off Wednesday's Fed momentum? Stay nimble. The focus will now shift to today ’s Nonfarm Payrolls.
US equity benchmarks roared higher in the final 90 minutes, but can we continue? The relative strength thrust in the Nasdaq (NDX) versus Consumer Staples (XLP) has continued. Also, inverse head and shoulder patterns going back to April 26 in both the S&P 500 (SPX) and NDX should provide more intermediate-term tailwinds. Still, price action in both the S&P and NDX achieved some pretty crucial levels of resistance and although we remain bullish in bias, if you are leveraged and trading this rally, it is imperative to have capitalized somewhere.
It is not uncommon to see a back and fill after achieving big upside levels. We will look to resistance aligned with the previous gap at 4275.50-4283.50 as our pivot and point of balance; the S&P must hold decisively above here in order to signal a continuation pattern. Otherwise, the door will be opened for a backtest of major three-star support in the S&P and NDX.
Crude Oil (CL=F) ripped to the highest level since March 24 after OPEC+ said it would add 432,000 bpd in June and the White House announced a plan to replenish the country’s shrinking oil reserves. The OPEC+ meeting lasted all but 13 minutes, but a token increase does not change the fact the cartel simply cannot produce that amount of oil. In April, they were at 164% compliance, producing about 800,000 bpd below their quota. The market is also coming to the realization of how temporary the SPR splash was, and those reserves need to be replenished ‘expeditiously’. With that said, traders do want to keep an eye on the US Dollar paring yesterday’s losses, demand forecasts being revised lower, and the path of China lockdowns; all are potential headwinds in the near term.
Gold (GC=F) and Silver (SI=F) ripped higher after the Federal Reserve hiked 50-basis points and announced the start of quantitative tightening next month, see comments in the S&P/NDX section. Remember, precious metals settle before Fed policy decisions and their post-settlement moves are accounted for in the following session. These are terrific moves to see as both Gold and Silver dig out of their recent fall, however, the US Dollar and rates are on the mend this morning and will pose significant headwind to the sustainability of this rally.
Today brings Nonfarm Payrolls.
Learn more about Bill Baruch at Blue Line Futures.