FOMC expectations and the future for US stock indices

Markets volatile with 'triple witching' event

US stock indices ended last week mixed after volatility on Friday thought to be related to the ‘triple witching’ event (expiry across stock options, index options and futures) saw key stock indices close lower. For the week, the Dow Jones added 41 points (0.12%), the S&P 500 closed 0.16% lower, and the Nasdaq lost 0.5%.

This week is a huge one for markets, with central bank meetings for the Federal Reserve Bank (Fed), the Bank of England (BoE), the Bank of Japan (BoJ), the Norge's Bank, the Riksbank and the Swiss National Bank (SNB). On top of that, there is CPI inflation data in the UK and Japan, as well as global flash purchasing manufacturing indexes (PMIs) later in the week.

Ahead of Thursday morning's FOMC, according to the CME's FedWatch tool, the rates market is assigning a 99% chance that the Fed will keep rates on hold in September. It then sees a 27% chance of a rate hike in November.

The FOMC is widely expected to maintain their target rate for the Fed Fund at 5.25%-5.50%. This means all the focus will be on the accompanying statement. The Fed Chair is expected to provide a balanced tone, like Jackson Hole, providing optionality with a mix of dovish and hawkish comments in accordance with the Fed's data-dependant stance.

The SEP (dots) will be of interest, with the 2023 median expected to reflect one more 25bp rate hike for a terminal rate of 5.50%-5.75%. A final rate hike would be considered fine-tuning as the Fed approaches the end of its rate hiking cycle. Further out, the 2024 median dot will likely reflect 75bp of Fed rate cuts next year.

US Fed Funds rate chart

S&P 500 technical analysis

The view remains that the correction in the S&P 500, which started in July, has further to go. Specifically, we are looking for another leg lower to retest and break the mid-August low with the potential to test uptrend support at 4250/20 to complete a Wave IV (Elliott Wave) corrective pullback.

Should the pullback play out as expected, we then expect to see the uptrend resume, which would see the S&P 500 test and break the highs of July and possibly set up a test of the bull market 2022, 4818 high.

SPX daily chart

Nasdaq technical analysis

The view remains that the correction in the Nasdaq, which started in July, has further to go. Specifically, we are looking for another leg lower to initially retest the mid-August low and uptrend support 14,600/500 area. A sustained break below 14,600/500 can test wave equality support 14,200/14,000 area to complete a Wave IV (Elliott Wave) corrective pullback.

Should the pullback play out as expected, we then expect to see the uptrend resume, which would see the Nasdaq test and break the highs of July and possibly set up a test of the bull market 2021, 16764 high.

NDX daily chart

_{TradingView: the figures stated are as of 18 September 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}