US STOCKS OUTLOOK:
- S&P 500 jumps 2.24% and scores its biggest two-day gain since April 2020
- Nasdaq 100 soars 3.7% and reaches its best level since March 4th
- Traders bet that the Fed’s monetary policy outlook is appropriately balanced and sufficient to control inflation without triggering a recession
Most Read: March Federal Reserve Meeting, Rate Decision
Following Tuesday’s solid gains, U.S. stocks staged another powerful rally on Wednesday, supported by improved investor sentiment following news that China will step in to support the economy and reports that Russia and Ukraine have made progress toward a peace deal. On the other hand, the FOMC lift-off and monetary policy outlook failed to derail the rebound, but instead appeared to reinforce upside momentum on bets that policymakers will succeed in containing inflation while engineering a soft landing.
After all the twists and turns, the S&P 500 soared 2.24% to 4,357, posting its biggest two-day increase since April 2020. The Dow Jones also accelerated its advance, jumping 1.55% to 34,063 at the closing bell. For its part, the Nasdaq 100 was once again the start of the show and managed to score a 3.7% gain to end the session at 13,956, its best level since March 4.
Today, the Fed concluded its highly anticipated March conclave. In line with consensus, the central bank raised the federal funds rate target by 25 basis points to 0.25-0.50% and announced that it expects to begin reducing the size of its balance sheet at an upcoming meeting. The move to lift borrowing costs by a quarter of a percentage point came by split decision, with St. Louis Fed President James Bullard voting in favor of 50 bp adjustment, a sign that more forceful actions could be on the horizon amid four-decade high CPI figures.
The communique noted that indicators of economic activity and employment have continued to strengthen, and that inflation remains elevated reflecting supply and demand imbalances caused by the pandemic, rising energy costs and broader price pressures. At the same time, the statement warned that the invasion of Ukraine is creating uncertainty, acknowledging that the geopolitical crisis is likely to reinforce inflationary forces and weigh on the recovery.
Focusing on the “Summary of Economic Projections”, there were major revisions across the board. According to the new forecasts, GDP will only grow by 2.8% in 2022, down from the 4% expansion envisioned in December. Inflation, meanwhile, was revised sharply higher, with core CPI expected to increase by 4.1% this year, vs 2.7% previously.
FED SUMMARY OF ECONOMIC PROJECTIONS
Source: Federal Reserve
As for monetary policy, the dot plot showed a steeper path of interest rate increases for this and next year, a shift that pushed the short end of the Treasury curve higher, at least momentarily. For instance, the median expectation now implies that interest rates will rise to 1.9% in 2022, a level consistent with seven standard 25 basis point hikes (as a reminder, central bankers were leaning toward three hikes for 2022 three months ago). For 2023, the cost of money is seen drifting to 2.8%, indicating that interest rates will have to rise above the “neutral” rate that neither boosts nor slows growth to control inflation.
Although the Fed’s normalization roadmap is quite aggressive, it was not hawkish enough to provoke risk-off mood. In fact, judging by the market reaction, it seems that Wall Street is convinced that the tightening cycle strikes the right balance to control inflation without triggering a recession. If this view prevails and we see a follow-through to the topside, the recent rally may continue in the near term, provided the geopolitical landscape does not deteriorate further.
NASDAQ 100 TECHNICAL OUTLOOK
After a 3.16% gain on Tuesday, the Nasdaq 100 rallied another 3.7% on Wednesday and exited bear market territory decisively, on sign that sentiment is on the mend. While the near-term technical picture remains negative, the outlook could begin to improve if the tech index clears the 14,050 hurdle and manages to establish a higher high by pushing above cluster resistance in the 14,458 area. If this scenario plays out, 14,901 would become the next upside target. On the flip side, if bullish impetus fades and sellers return, support is seen at 13,735, followed by the 2022 low in the 13,000 area.
NASDAQ 100 TECHNICAL CHART
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—Written by Diego Colman, Contributor