Powell‘s post-FOMC words will dictate market direction
Abraham George Market Musings
These days we are never short of volatility, especially on days of the inflation announcement. In the last three months, we had more than a 5 % trading range on inflation release dates. That used to be usually a monthly movement. We had something similar yesterday too. The November inflation report showed a cooling off in the rate of change in prices. Markets performed well in all four assets. The dollar was down; bonds, stocks, and commodities were sharply up.
The month-to-month change in inflation came in at .1%. On an annualized basis that is well below the Fed’s inflation target of 2%. If we take the last three months’ rate it is under 4%. The point is the Fed and market forces have arrested the rise of inflation and it is trending down now.
As I mentioned in the last report on the markets, the timing of the inflation report yesterday came in very conveniently for the Fed to make an informed decision just ahead of the Fed meeting today.
More than the Fed's decision on the actual interest rate movement what actually matters will be the language Jerome the Fed Chairman will use to explain current market conditions and what he anticipates.
In this context, it is worth revisiting what he recently spoke in a prepared speech at the Brookings institute.
He categorically said, “it makes sense to moderate the pace of interest rates”. He further emphasized that the “timing for moderating the pace of rate increases” may come as soon as the December meeting which is today. He also added that it is not in his intention to ‘over tighten’. Therefore, the market is pricing in a 50 basis point rise today. Any deviation from that could cause much bigger volatility in both directions of the markets.
We also outlined in the last report the importance of the 200-day moving average and the downward-sloping trendline in the price of the S&P 500. The markets decisively broke above the levels yesterday but were unable to close above it. Today’s fed action and especially any dovish language from Powell stating that the Fed will pause for further hikes will be a big catalyst for the markets to rise sharply higher again.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.