The release of the minutes from the FOMC’s July meeting gives market participants something new to digest from a Fed that has otherwise removed forward guidance from its communication strategy.
Unlike the post-meeting press conference, in which Powell’s words were interpreted as being somehow dovish (and thus bullish for risk assets), the minutes themselves reveal no such dovishness. In fact, anyone determined to find evidence of an imminent policy pivot in the text will really have to stretch their interpretive faculties to do so, because there’s really not much there for the bulls.
In the minutes, the committee noted that spending and production had both softened, and that consumer expenditures, housing activity, business investment, and manufacturing production had decelerated from last year. Nevertheless, a period of below-trend GDP growth was regarded by the participants as likely helping to reduce inflationary pressures.
All participants were in agreement regarding July’s 75-basis-point hike, but beyond this, there was a general anticipation that ongoing increases would be appropriate to achieve the committee’s objectives. Some participants even indicated that: “once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.”
This is not the language of a committee that appears to be changing course any time soon, but with no meeting until September, markets will have nothing other than the data itself, the news cycle, and, of course, the price action to go on. We also need to watch the rest of the world. How sticky is inflation expected to be globally? Have central banks been too passive in hiking rates and are tougher hiking policies from central banks still to come? There are lots of uncertainties at the moment, so the technicals can be especially helpful in times like this.
The Technical Picture
Moving to the price action. The sobering effect of the post-meeting minutes comes at a time when the technical picture on US stocks also appears as though it may be on the turn. We saw an almost 19% bounce in the S&P 500 since its June lows, a 15% bounce in the Dow Jones, and perhaps most interestingly, roughly 24% bounces in both the Nasdaq and Russell 2000.
These last two exemplify the state of confusion around what the appropriate weighting in the underlying sectors ought to be. This is evident in the fact that the two technical stand-outs are technology and utilities.
Turning back to the broad indices, we see a daily picture that, while perhaps not obviously bearish, signals difficult tests ahead. The S&P 500 tested and was rejected from its 200-day moving average (red line) on August 16. Similarly, the Russell 2000 began testing its own daily 200-day MA on August 12 and was rejected on Aug 17.
The Nasdaq, despite enjoying the largest bounce in percentage terms, is still more than 4% from its 200-day and has temporarily reversed course like the others. The Dow Jones is somewhat of an anomaly here, having broken above its own 200-day MA on August 16, and is now testing it from above as support.
The weekly picture also adds weight to the bear argument. Despite all four indices having recently broken to new local highs, we’re seeing the price diverge from RSI in the S&P and Nasdaq, a classic indicator that the move may be running out of steam.
When you couple this with what actually appears to be the Fed’s stance going forward as expressed in the minutes, this could be a turning point in the current trend (and associated narrative).
Levels to Hold
The S&P has to convincingly clear 4550 for this bull story to receive a technical stamp of approval. For the Nasdaq, this level is at around 15000, with the Dow’s being at 34900 and the Russell’s at around 2100. These last two are actually worth focusing on as both are much closer to testing their own critical levels from below than either the S&P 500 or the Nasdaq, and, as we’ve seen above, these two have yet to have their RSIs diverge from the price action.
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