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Week Ahead: Fed Meeting Will Test The Short-Term Rebound

Published 10/30/2022, 09:25 AM
  • Every time the short-term trend rises, traders believe rates will ease
  • While some central banks began slowing rate hikes, the ECB persisted
  • US data and Fedspeak suggest the Fed will persist as well

The Federal Open Market Committee's interest rate decision will test the most extended weekly advance since August. The two-week bounce defied disappointing earnings on the outlook that the Fed will slow its rate hikes. Perhaps traders' expectations flip on this theme according to the ebb and flow of the market price action.

After the S&P 500 Index met a ceiling in mid-August at the top of its falling channel since its January record, investors were concerned that the Fed's aggressive path to rising interest rates would push the economy into a recession. Before that, when the price rebounded from the mid-June low's test of the channel, the market narrative dictated that inflation was easing, and so would the Fed's jumbo hikes.

Now, the momentum is up after the price bottomed out in the short term, within the medium-term downtrend. In last week's post, I reiterated that stocks could rise in the short term but are on a trajectory to continue lower in the medium term.

The market has bet again and again on a less hawkish Fed, and so far, that has been proven wrong with each end of the short-term uptrends as stocks resynchronized with the medium-term downtrend.

As I showed above, the risk-on risk-off narrative correlated with the short-term swings within the downtrend, the so-called "Fed pivot" drummed up since the summer lows and repeated itself with each bounce. So far, overall data demonstrated persistent inflation, and a hawkish Fed posturing remained steadfast amid ongoing pressure to ease its rate hikes.

Investors also expect central banks around the world to ease tightening. The Reserve Bank of Australia lifted interest rates by a smaller-than-expected 25 basis points on October 4. The Bank of Canada slowed its rate hike by only 0.5%, lower than the 0.75% consensus on October 26.

On the other hand, The European Central Bank maintained the 0.75% rate hike, its fastest rise in history, fuelling recession fears after investors expected a lower 0.5% increase on Thursday. Moreover, ECB President Christine Lagarde pledged to maintain the path to higher rates until reaching the 2% target.

Meanwhile, the yield curve deepened, flashing another recession alarm bell.

US 10-year vs. 3-Month Chart

On Wednesday, the 10-year note yield fell below the three-month bill. This specific inversion is rare, demonstrating that investors expected the Fed's persistent and unwavering tightening would push the economy into a recession.

The dollar fell for the second straight week.

US Dollar chart

The dollar bounced to end the week, extending above the medium-term uptrend, after having registered a descending series in the short term, demonstrating the tension ahead of the US rate decision.

Gold fell despite dollar weakness, as investors preferred to take their money to stocks.

Gold Futures Chart
Gold is developing an H&S continuation pattern, having completed a massive double-top since April 2020.

Bitcoin climbed last week to a six-week high on a short squeeze in a risk-on week.

Technically, however, the trend is still down.

Bitcoin Weekly Chart

The peaks and troughs are descending, and the cryptocurrency completed a massive top, a development I've been monitoring since January.

Disclosure: The author has no positions in any instruments mentioned in this article.

Latest comments

Sonye Henry
http://www.investing.com/analysis/week-ahead-fed-meeting-will-test-the-shortterm-rebound-200631693
2 or 3 more 3/4 point raises followed by 4 half point raises should do the trick.
No way! That is way too aggressive. I'm glad you're not the FED Chair, lol
yes you told that markets may rebound in the short run. I read all your articles
Simple. $200 a shate X 14X equals 2800. Simple math. That is where the s&p is headed in thr next 2-4 weeks.
Does the Dollar hold the trendline or break support? 🤔
Possible Bitcoin 2022 Double Bottom 🤔
great recap Pinkas, thanks
thanks.  i think the charts miss that there are huge inflows of cash coming in to buy equities.  While my midterm view matches your declining lines, it seems I will be in some pain in my SPXU while the SP500 runs up to 4200 and then drops in Q1 or Q2 2023.  wait for some of the housing related companies to report earnings after housing drops, doesnt seem like it will be good.
$200 a share times 14X at best is 2800 s&p. And it not gna rally another 10% after goin up 11% in leas than a month. Thats fantasy land talk. The fed will not pause. The fed will not slow down the rate of hikes. The fed is in the 3 rd inning of rate hikes. And 75 BP is nothing. 200-250BP at each meeting is appropriate. Unless you traded before 2000 you just dont understand. Because all you have been taught is its normal to have 0% rates and unlimited QE. News flash. Its the opposite of all of that. And the size of the piper we will pay is so big, you cant even imagine. But youll learn and see what a NORMAL market looks like.
 read much?  my position is in SPXU which is a 3x short on the SP500.  I am very much the opposite of millenials who have never seen QT and high interest rates.   While the overall trend is going to be down in 2023,  many, including Mike Wilson of MS,  predict a rally before end of year to 4200.   Its not what I want since I am short, but it is a reality that funds are flush with cash and many want and will bid the market to go up because all they know is V shaped recovery.  I agree that bigger hikes are more appropriate, but this FED is not Volker. The better position I think for me was to be long and ride the rally up into January then short.  by mid-summer the effects of high interest rates will have cooked in the RE market and earnings will be further compressed.
Thank you Mr. Cohen for your excellent articles
Since you are one of the only authors replying when are they going to fix the spam problem? Do they get paid to allow it?
*Bots
Thanks for raising this jason. I find it annoying and it is a good reason not to get a subscription. I am, however, happy some of the charts are now large enough to read on my phone without a microscope. Too bad they no longer open in their own window.
Hi Jason, sorry, I don't know.
It doesn't matter what the FED does. The economy is doing great and will not be stopped. 5 years from now consumers will gladly pay $2,000 for their iphones
Great?? $31+ TRILLION in National Debt (highest level since ww2), Corp debt of $11 Trillion and inflation of 8.5%+ (all due to all of that debt / Fed printed money). The only reason the US is not already in recession is as the US dollar is the world's reserve currency. But everyyyyyy headwind says the economy is too hot and needs a dip / recession to cool down.
Wow. Another millennial or gen z who has no idea whats about to hit the entire economy and even worse markets. $200 X14X=2800. Thats real life.
Ya nobody knows what the fed will do. Will it be 50 or 75? A 75 will completely shock the market... Not...
4,75tytfg 4,75% i hope not, that will literally do me in, got Nasdaq on sale, cause i was dumb enough to do as i had read, and at first it was right, the price will not go over 11.700 and it didn't, and boy did we go down, as i had read, but the article said, that it would drop down to under 10.000, 9000 something, tog profit, and sold again, and it just blew up, if it hits 12.000 I'm out, i really hope it will drop again, very soon, but it doesn't sound like it 😕
Wanted to reply to your post, but they banned me, but they don't banned bots, isn't that just strange...???
The fed will not stop. Because 75BP is failed arthur burns monetary policy. Do any of you even know who he is? Probably not. Its a volcker we need NOW to do whats rite, NOT whats popular so crybabies on WS dont have to deal with reality. Apple FV $90. AMZN FV $11. Msft FV $150. Etc etc etc. 90% of the entire market other than energy is grossly overvalued. You have all just been brainwashed thinkimg 0% rates and unlimited QE is normal. Haaaaaa
I saw diesel for $5.99 yesterday in WA state. You'll never get inflation under control with those prices.
USDs recent peaks and troughs as demonstrated above, could it be a flag formation?
Good question. No. A flag is typically 1-3 weeks and this one's over a month. More importantly, it's not crowded. Most importantly, it doesn't follow a sharp spike.
Excellent article. Thank you Pinchas.
Thank you for sharing the article 💯
I think markets have priced in nov 75 rste thats a given, markets are reacting to a dec rate now which likely be .50 snd that will be enough to test that upper channel.
Rates are not the sole driver of market price.
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