The stressful day ended higher!
Today, the FOMC's two-day meeting will start, and tomorrow we will have the announcement and the Fed chair's press conference. Ahead of the meeting let's see what is going on in the market.
Last night SP500 lost more than 10% comparing its 2022 high on January 3. Many investors and market participants focused on FED's possible hawkish policy and geopolitical tensions, therefore with the emotional reaction they put their fingers on the sell button. I am saying the emotional because looking at the earnings results shows us a different outlook in the market. Fourth-quarter reporting season is in full run, so far, we had the reports from 65 companies on the S&P 500 list. Of those, 77% have beat the expectations, according to data from Refinitiv. Consensus expectation analysts about to see S&P 500 annual EPS growth of 23.7%.
Therefore, and according to such great earnings reports, we could see some buy orders by hunters pushing the indexes into positive territory by closing the bell. The Dow Jones Industrial Average rose 99.13 points, or 0.29%, to 34,364.5, the S&P 500 gained 12.19 points, or 0.28%, to 4,410.13 and the Nasdaq Composite added 86.21 points, or 0.63%, to 13,855.13.
And now the FED two days meeting is going to start today. The FOMC member's decisions, comments, and outlooks will clear the market direction. And after the meeting, Chairman Jerome Powell's subsequent Q&A session for clues as to the FED's timeline for increasing the inflation also must be watched closely.
With respect to all contractionary views and expectations, I think investors overpriced on a sharp and hawkish stance by FOMC. It is correct that Inflation is high and even can increase a bit more, however, we have many signals including slower home price increase and producer inflations, that consumer inflation also can be softer in the following months.
Besides all decisions about the rate hike timeline, we should not forget about the FED balance sheet as well. As Mr. Powell mentioned earlier this month in his nomination hearing in the Senate, FED "At some point perhaps later this year will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.” “…mindful the balance sheet is $9 trillion. It’s far above where it needs to be.”
On the data front, when we are looking at some important factors would be better to be more cautious. Initial jobless claims in the past weeks have been increasing. And despite the lower unemployment rate under 4%, still, the minority unemployment rate is above 7%. This is what Mr. Powell also mentioned about that and commented that FED support will continue so that all minorities can benefit from them as well. About other data, yesterday's January PMI data confirmed a bit of weakness in the manufacturing and service sectors. This weakness happening, while January we did learn that the Omicron variant is not much dangerous than previous variants, therefore the concerns over that were less than December.
So now, we have different scenarios. What is my expectation is to see the FED at the "Wait and See" policy. It means that Fed will not end QE earlier, rate hikes will not happen too fast, and right after ending the bond purchasing plan. Just about the balance sheet, I have some doubts, and I think this meeting's gravity center is exactly that. What announcement will tell us about that and Mr. Powell's answers to the question with this topic, will lead the markets.
Market reaction:
Leaving interest rates and the taper timeline unchanged with encouraging comments from Chairman Powell will softer the market struggling and pause the bears, whit possibility of returns in the riskier assets. On the other hand, more tightening policies, as markets expecting to see that, could lead to another leg lower in risk-sensitive assets like commodity currencies and stocks. However, it can not go way too much, as buy-in-deep interests, with the high volume of liquidity in the markets will be slower and may even stop it. And finally, even if it is so unlikely, the early end to QE could exacerbate the recent selloff for a bit longer time, before the market can recover itself.
And my last comment, either way, we should listen and pay attention to every word from Fed Chairman Powell and the rest of the FOMC this Wednesday!
