Key takeaways from the FOMC meeting: S&P 500, US Dollar, USD/SGD

Market Recap

Following the Federal Open Market Committee (FOMC) meeting, US indices settled with losses overnight, unwinding almost all its gains this week. Here are five key takeaways from the Federal Reserve (Fed) meeting:

• The Fed has hiked rates by 25 basis-point to the 4.75-5% range, in line with broad expectations.

This is the middle ground to show some resolve in fighting inflation amid the hot labour market but also offer some policy flexibility in adjusting to economic uncertainties.

• Some wording change in its statement (‘ongoing increases’ replaced with ‘additional policy firming’) suggests that we are near peak rate.

Market participants caught hold of that, with interest rate futures pricing for the last 25 basis-point hike in May to conclude the hiking cycle.

• The terminal rate was held unchanged at 5.1%.

This signals a prolonged rate pause, which could be a pushback against rate cut bets. Broad expectations leading up to the meeting were looking for as much as 75 basis-point worth of rate cuts in 2023. Policymakers do however still see rates coming down in 2024, albeit slightly higher than before (4.3% versus 4.1% in December).

• Fed’s projections revealed mounting economic risks and prolonged inflation fight.

Core Personal Consumption Expenditures (PCE) inflation forecasts for 2023 and 2024 was revised slightly higher by 0.1% from December, so a prolonged fight with inflation should be expected. The bigger surprise may be from growth conditions. While 2023 saw a slight downward revision to 0.4% (previous 0.5%), the 2024 estimate saw a sharp drop (1.2% versus previous 1.6%) in just a short span of three months. This could point to higher risks of a hard landing, following recent banking turmoil revealing ongoing cracks in the economy towards tightening.

• Jitters could come from lingering risks of banking fallout.

In the Fed’s statement, it was added that ‘recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation’. Fed Chair Jerome Powell also indicated that the banking industry stress ‘could easily have a significant macroeconomic effect’. The final blow was delivered by US Treasury Secretary Janet Yellen, who mentioned that a ‘blanket insurance’ to US bank deposit insurance has not been considered or discussed. This could set the stage for further capital outflows from regional banks, which amplify the risks for further banking fallout. The lack of reassurances on that front triggered a risk-off reaction from markets, with a defensive lean from markets reflected in lower equities prices, lower bond yields and higher gold prices overnight.

Overall, the Fed has taken on a cautious stance and while its stance has been a clear dovish shift from the previous meeting, mounting economic risks are now the broader concern. The S&P 500 has failed to cross the key psychological 4,000 level yesterday, where a Fibonacci confluence zone resides. That said, previous Fed meetings suggest that initial post-Fed market reaction may not necessarily determine the trend ahead, so it is important to look for any follow-through over the coming days. The S&P 500 is back to retest its key 200-day moving average (MA) and hanging above a downward trendline still keep hopes of further upside alive. Greater convictions for the bulls may have to come from a move above the 4,000 level (post-Fed meeting sell-off) to pave the way to retest its February 2023 high.

The US dollar has breached its 103.12 level, with the lower low providing an overall downward bias. Pockets of dovishness in the Fed meeting have pointed to the case of a lower interest rate differential outlook ahead, which seem to override safe-haven flows from a weaker risk environment. The 101.30 level could be up for retest ahead, with any failure to hold potentially paving the way to retest the 99.00 level next.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.58%, ASX -0.79% and KOSPI -0.41% at the time of writing (9am SGT). A risk-off tone following the recent Fed meeting has set the stage for the Asian region to follow through with some losses, with the Nasdaq Golden Dragon China Index also down 1.8% overnight.

Singapore’s consumer price index (CPI) will be released in the afternoon. Following the renewed surge in inflation in January, pricing pressures are expected to show further persistence with a move to 5.7% from the previous 5.5%. Previous projections from the Monetary Authority of Singapore (MAS) suggests that core inflation may remain elevated for the first half of this year, and any persistence in Singapore’s inflation to translate to SGD strength on speculation of tighter monetary policies.

The USD/SGD has taken its cue from the US dollar weakness lately, facing strong resistance at the 1.337 level, where a Fibonacci confluence zone stands. The breach of its 50-day MA further adds to the downward bias, with the turn in moving average convergence/divergence (MACD) suggesting some moderating upward momentum. The 1.318 level could be on watch next, with the level supporting the pair on three previous occasions back in 2021.

Wednesday: DJIA -1.63%; S&P 500 -1.65%; Nasdaq -1.60%, DAX +0.14%, FTSE +0.41%