FOMC Meeting Preview

The market is pricing in a 75bps hike, but there is still a sizable contingent of analysts who expect more. What else could come out of this week’s FOMC meeting?
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The shifting views

The latest survey shows there is a that the Fed will hike rates by 75bps against a 100bps hike. Just a week ago, there was a near-unanimous view the Fed would just do a "triple" hike. Inflation both headline and core coming in above expectations, albeit down from the month before, changed that math.

But, it's important to remember that there hasn't been a meeting since July, and therefore the Fed is likely to consider both August and July CPI figures. And the July numbers were substantially better. Headline CPI is trending downward, if not as much as anticipated. Core CPI more than triples the target, which supports further tightening. But it would be expected for headline CPI to start falling before the core does.

Where's the pivot?

While Fed officials talk a tough game, the Fed funds rate is getting close to the level which many analysts see as "neutral". This means that the point when the Fed starts slowing down is coming up, and that could be a bigger focus for the markets.

With a 75bps hike, the markets might turn their attention primarily to the dot-plot matrix, to see if there are any signs that the "pivot" is sooner than expected. Previously, Fed officials communicated they expected rates to remain elevated into the first quarter of next year. If the summary of expectations shows an earlier drop in rates, it could give the stock market a boost.

Another potential surprise would be in Powell's presser if he were to indicate that smaller hikes were to be expected. So far, he's been forceful in communicating tough action on a meeting-by-meeting basis, so hinting that rates might be moderating in the future would be seen as a change in outlook.

SPX battles near golden pocket

SPX 500 is attempting to recapture the golden pocket (i.e. the 61.8% Fibonacci retracement of the 3630-4325 leg) near 3900. A pinbar on Tuesday supports the idea of a near term bottom. 4,000 is a major resistance bulls must regain control of for an attempt at the 38.2% equivalent near 4075. If the cluster formed by the retracement and 50-day average breaks, the 200-day lies at 4155.

The index has been on a downtrend for several months, with the 50SMA below the 200SMA since February. Any rebound could be short-lived if sellers return, opening room for the 3635 low. In the interim, 3800 is support.

Takeaways
There is now more likelihood the Fed will hike rates by 100bps and not 75bps because of the latest inflation figures. But the Fed will consider the two last prints, not just August’s and July was a stronger sign headline inflation maybe near a peak, however, the issue remains with core inflation.

The Fed is nearing the point where they stop raising rates, and that is a big focus for markets. If the Fed hikes to expectations and the dot-plot show an earlier ‘pivot’, it could give the stock market a boost. Additionally, if Powell hints at a future moderation of interest rates, stocks would react favorably. A message of ‘more of the same’ is likely bearish for stocks.