Recovery in risk sentiments post-Fed meeting: S&P 500, China A50, US dollar

Market Recap

The Federal Open Market Committee (FOMC) meeting outcome was met with a positive reaction from the US equity markets (DJIA +1.00%; S&P 500 +1.46%; Nasdaq +2.50%) despite the Fed delivering a 75 basis-point hike to a range of 1.5% and 1.75%. This may mark the largest increase since 1994 and a hawkish shift from Fed’s previous guidance of 50 basis-point increases. That said, these have been largely priced over the past few days, with the ramp-up in rate expectations seen from the Fed Funds futures and the in-tandem fall in equity markets from last Friday, therefore it may not come as much of a surprise. The decision is almost unanimous (with only Fed member Esther George calling for 50 basis-point), with the July’s meeting likely another selection between a 50 basis-point and 75 basis-point hike.

Having fallen behind the curve in keeping inflation down, the Fed is clearly compensating with outsized rate hikes now, which may elevate risks of a hard landing. Based on its economic projections, growth forecasts have been revised sharply lower (central tendency at ‘1.5% to 1.9%’ from previous ‘2.5% to 3.0%’) while inflation is to remain higher (central tendency at ‘5.0% to 5.3%’ from previous ‘4.1% to 4.7%’) through 2022. The surprise contraction in US retail sales yesterday (-0.5% month-on-month versus 0.8% consensus) may already be an indication of slowing growth momentum, along with the Fed’s dot plot forecasting rate cuts into 2024 – a sign of economic headwinds ahead. The dot plot puts interest rate forecast at 3.375% this year, an upward revision from the 1.875% in March but is lesser than what markets are pricing.

That said, coming after a more than 10% sell-off in the S&P 500 over the past week, market participants may be seeking for a reprieve and the Fed’s resolve to keep inflation under control provided some optimism. Fed Chair Jerome Powell also signalled that the rate increases may come in smaller forms towards the latter part of the year, as opposed to the outsized 75 basis-point increase overnight. These factors may be what markets are tapping on for some near-term recovery in risk sentiments. The S&P 500 is attempting to bounce off the 3,700 level, but the downward trend remains intact, having formed another new low just before the Fed meeting. One may watch for any formation of a lower high, which may potentially leave the 3,960 level on watch.

Asia Open

Asian stocks look set for a positive open, with Nikkei +2.14%, ASX +0.95% and KOSPI +1.97% at the time of writing. The recovery in risk sentiments post-Fed meeting may aid to provide some relief for the Asia session as well, with the fall in VIX overnight pointing to some easing fears for now. US-listed Chinese shares continue to rise by around 2% overnight and with Chinese indices forming a higher low lately, the near-term upward trend may be poised to continue. The China A50 index continues to trade within an ascending channel pattern, with recent upward move marking a retest of the upper channel trendline. Any retracement may leave the 14,000 level on watch for the formation of any higher low, which marks a key resistance-turned-support.

With the FOMC meeting outcome concluded yesterday, markets may be looking to other central banks’ decisions out from UK and Japan. Tomorrow’s Bank of Japan (BoJ) meeting will be on close watch, with the USD/JPY (大口） continuing to hover at its highest level since 2002 despite overnight US dollar weakness. Despite global central banks shifting towards a tightening stance, the BoJ is expected to remain as the outlier with its ongoing commitment to take on an opposite path from the US’ tightening stance. There has been immense selling for Japan’s 10-year government bonds (JGBs) recently, with the BoJ facing increased pressure from speculators who seek to challenge the central bank’s status-quo – potentially expecting an upward revision in long-term interest rate. While the likely scenario may still point towards the BoJ defending its bond’s ceiling by conducting unlimited bond purchases, anxiety is clearly running high with the upcoming BoJ meeting being looked upon for any reassurances of a no-change in policies.

On the watchlist: US dollar index’s rally taking a breather

The US dollar index initially jumped higher on the confirmation of the 75 basis-point rate increase from the Fed, but were quick to pare back on its gains, seemingly on comments from Fed Chair Jerome Powell that an outsized increase of a 75 basis-point may not be common. This may come after its recent rally of around 3.4% over the past week calls for a breather, with the relative strength index (RSI) reverting from overbought region to neutral territory. That said, the upside risks to rate increases remain intact for now as front-loading takes precedence in the near-term to keep inflationary pressures under control. The US dollar remains in an upward trend with the series of higher highs and higher lows since June last year, with near-term support to watch at the 103.80 level.

Wednesday: DJIA +1.00%; S&P 500 +1.46%; Nasdaq +2.50%, DAX +1.36%, FTSE +1.20%