S&P 500 Stalls at 2022 Range Midpoint as Powell Talks Faster Hikes

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S&P 500 ETF, Russia, Interest Rates, Dollar and USDJPY Talking Points

  • The Trade Perspective: Pairing Dow Bullish to Nasdaq 100 Bearish; CADJPY Bearish Below 94.35; GBPUSD Bearish Below 1.3100
  • A fundamental-defying charge in risk appetite through this past week seems to have hit a wall with the S&P 500 stalling out at the overt 2022 range midpoint and 200-day SMA
  • Inflation pressures are picking back up again while a wave of central bank speak has kicked off with the Fed’s Powell warning that faster hikes may be ahead

That Fundamental-Defying Risk Appetite Run Has Stalled

Last week made an impression for hopeful bulls and skeptical bears alike. With statistics like the major US indices posting their best week’s performance since the November 2020 election and the S&P 500 securing only its second four-day consecutive daily 1.0 percent or greater gains in 40 years, even the cynics were contemplating becoming believers. I am a firm believer in pragmatism over demanding rationality from speculatively-motivated crowds, but a market diverging from its course fundamental and technical backdrop is likely to last for only so long. With Monday’s waver across the risk spectrum, we may have already extracted the majority of the ‘relief rally’ potential. For the SPDR S&P 500 ETF (and underlying index), hesitation happens to coincide with some fairly explicit technical resistance. The 445.50 level (4,470 for the underlying index) happens to represent the 200-day moving average as well as the midpoint of the 2022 range – from the January 4th peak to February 24th trough. That alone wouldn’t alter the market’s course in my view; but with the prevailing trend for the year thus far aiming lower and a compounding fundamental trouble ahead, a plateau in the counter-trend bounce would seem fitting given the circumstances.

Chart of SPY S&P 500 ETF with Volume and 100-Day Mov Avg (Daily)

Chart Created on Tradingview Platform

Speaking of the fundamentals, the market’s tend to rely increasingly on a solid footing when critical levels come into view or endeavoring for genuine momentum. The midpoint of the 2022 range is a reasonable milestone to force some degree of introspection, but it doesn’t necessarily mean that the markets have totally lost the winds from their sails. Yet, if we are taking stock of the top focus and concerns of investors at present, the risk is for headlines to cut down on tepid conviction. Monetary policy is looking to be these week’s most heavily scheduled theme with authorities coming out of the gate with warnings of accelerated rate hikes. That is a view urged by a rebound in commodity prices after the swoon through the first half of last week. Then there is the ongoing Russia assault on Ukraine. Having passed the 26th day of attack, there is still no sign of imminent compromise and ceasefire. That said, the chances that diplomacy is found represent the most potent options for a short-term relief rally for the broader market.

Chart of Google Trends Search

Chart from trends.google.com

Inflation is No Longer a Passive Worry

In a ‘best case’ scenario where Russia halts its military actions in Ukraine and the countries negotiate a resolution, there is likely to be a significant relief rally even after the kind of move we saw last week. That said, the scope of a long-lasting and continuously escalating risk appetite trend doesn’t seem to align with the withdrawal of a single hurdle. There remains a relentless drive of inflation pressures and a global monetary policy stance that seems committed to tackling the problem. Looking at inflation, there was a distinct jump to start this week. Crude oil jumped 6.7 percent Monday and wheat futures were briefly halted after hitting limit up. These upstream inflation pressure represent higher costs to consumers on a delay and a subsequent throttle in growth forecasts. In fact, rating agency Fitch downgraded its 2022 global growth forecasts 0.7 percentage points to 3.5 percent Monday.

Chart of WTI Crude Oil with 50-Day SMA and Volume (Daily)

Chart Created on Tradingview Platform

As for interest rate expectations, the pressure to fight inflation is broad but not exactly even across the board. Some major policy groups are holding onto their dovish reticence including the European Central Bank’s President Christine Lagarde and surprisingly the Reserve Bank of Australia Governor Philip Lowe. However, the allowance for such a position is disappearing quickly. To open this week, one-time inflation-tolerant Fed Chairman Jerome Powell made even more clear that he and the US central bank would be escalating the fight against persistent price pressures. After saying the group could use bigger rate hikes in the future without some degree of relief, Fed Funds futures increased the probability of 50 basis point hike at the May 4th meeting to 62 percent. That is aggressive. So aggressive that it is biting into growth forecasts with investors’ preferred 10-year to 2-year Treasury yield spread closing in on the ‘recession’ signal inversion – while the belly of the curve is already tipping negative (7 year, 5 year and 3-year spreads to the benchmark 10).

Chart of Relative Monetary Policy of the Major Central Banks

Chart Created on Tradingview Platform

What to Watch for Tuesday

As we move deeper into the trading week, I will keep an elevated awareness of the headlines relating to Ukraine; but there is a particularly dense run of scheduled event risk around the monetary policy consideration. Leaders of multiple major central banks are due to weigh in with their views and more than a few policymakers will be attending the BIS summit – a group that is notoriously vocal about calling out excess. Among the various policy speakers on tap, I will be looking specifically at the doves to see if their position has shifted which would thereby lift the range of views moving forward. ECB President Lagarde will have another opportunity to thaw her position against fighting inflation, the BOE’s Cunliffe is a waning dove, SNB President Jordan heads a central bank still sporting a -0.75 percent benchmark, the ECB’s Lane is arguably their most dovish voice and even SF Fed President Daly is still shedding some of her dovish skin from December 2021.

Calendar of Major Economic Events

Calendar Created by John Kicklighter

In terms of the markets to watch, there are numerous areas of great interest for me. That said, the potential for serious movement can be distorted by an mix of fundamentals, technicals or market conditions. The S&P 500’s challenge of resistance for example has technicals, but relief rally amid thinned volume could render that barrier far less important than a pure chart trader would consider. For EURUSD, the contrast in monetary policy is clear and growing more intense, but the technical levels are very flimsy in terms of generating a speculative response. GBPUSD is more interesting to me among the majors with the 1.3200 technical overhead giving scope for the Fed’s growing rate potential and anticipation for Wednesday’s UK inflation statistics. Challenging the ‘risk’ perspective, there has been a swoon from most corners of the market, but take a look at CADJPY. Like most other yen crosses it is motivated by rising rate forecasts with additional inflation pressure for the Loonie, but the risk appetite fuel hasn’t really flagged the exchange rate as it has more broadly. Having spelled a 10-day charge (longest run since April 2014), the reversal risk looks high. However, I will look for confirmation that the market is actually looking to turn rather than just expect it for convenience.

Chart of CADJPY with 200-Day Moving Average and Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

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