The FED continues to imply a recession
Yesterday, the FED hiked interest rates by 25 basis points, causing an initial rally in the U.S. stock market, followed by a selloff after FOMC’s press release. In his speech, Jerome Powell acknowledged the persistence of high inflation (replacing the tone of “easing inflation”), banking sector problems, and a strong labor market. Furthermore, he reiterated FED’s commitment to bringing the inflation rate back to 2%, adding that “some additional policy firming” may be required to achieve this goal (translating to the possibility of more rate hikes).
As for projection materials, the median forecast for the unemployment rate in 2023 is 4.5% (and 4.6% in 2024). We discussed a few months ago that historically, each 1% increase in the unemployment rate was always accompanied by a recession. Therefore, considering that the unemployment rate was 3.4% in January 2023, we could argue that the FED implies a recession over the course of the current year (even though it has been implying it at least since September 2022 through its forecasts).
In addition to that, the FED’s documents show a median forecast for FED’s fund rate at 5.1% in 2023, which is higher than the current target range of 4.75% to 5% (telling us that interest rates should be higher at some point). In our opinion, this means only more stress for the already weak U.S. economy. Due to that, we will stick to our previous assessment of more downside for the stock market in the coming months. Accordingly, we maintain our price target for SPX at $3 400.
Illustration 1.01
Illustration 1.01 displays the 5-minute chart of ES1! continuous futures. Yellow arrows indicate particular events in the market. Vicious whipsaws in the price can be observed.
Technical analysis
Daily time frame = Bearish (Weak trend)
Weekly time frame = Neutral
Illustration 1.02
Illustration 1.02 shows the daily chart of SPX and the bullish breakout, followed by invalidation after Jerome Powell’s speech. We will pay close attention to today’s price action in SPX. To confirm a bearish bias, we would like to see the price stay below the sloping resistance (ideally, manifesting more weakness).
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
As for projection materials, the median forecast for the unemployment rate in 2023 is 4.5% (and 4.6% in 2024). We discussed a few months ago that historically, each 1% increase in the unemployment rate was always accompanied by a recession. Therefore, considering that the unemployment rate was 3.4% in January 2023, we could argue that the FED implies a recession over the course of the current year (even though it has been implying it at least since September 2022 through its forecasts).
In addition to that, the FED’s documents show a median forecast for FED’s fund rate at 5.1% in 2023, which is higher than the current target range of 4.75% to 5% (telling us that interest rates should be higher at some point). In our opinion, this means only more stress for the already weak U.S. economy. Due to that, we will stick to our previous assessment of more downside for the stock market in the coming months. Accordingly, we maintain our price target for SPX at $3 400.
Illustration 1.01
Illustration 1.01 displays the 5-minute chart of ES1! continuous futures. Yellow arrows indicate particular events in the market. Vicious whipsaws in the price can be observed.
Technical analysis
Daily time frame = Bearish (Weak trend)
Weekly time frame = Neutral
Illustration 1.02
Illustration 1.02 shows the daily chart of SPX and the bullish breakout, followed by invalidation after Jerome Powell’s speech. We will pay close attention to today’s price action in SPX. To confirm a bearish bias, we would like to see the price stay below the sloping resistance (ideally, manifesting more weakness).
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
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