Fed uncertainty

The Fed’s pause in interest rate hikes indicates a cautious approach to monetary policy amid economic growth and inflation concerns, keeping investors watchful for any further developments in the coming months. There’s a prevailing fixation on whether the Federal Reserve is finished with rate hikes. Powell has made it evident that the central bank remains entirely data-dependent, lacking a predetermined course of action.

Prospects for Fed’s overtightening

With the Federal Reserve’s uncertainty about the adequacy of their policy, the prevailing odds seem to favor the Fed potentially overstaying their welcome or pursuing an over tightening strategy. Market sentiment suggests that interest rates are likely to remain above 3% concerning the headline Consumer Price Index (CPI) over the next six months.

Consequently, the likelihood of rate cuts in the near term diminishes, emphasizing the need for persistently higher rates and tightened financial conditions for any meaningful substitution of monetary policy. Short-lived spikes in rates at the long end of the curve won’t suffice to replace traditional monetary policy.

Market’s reaction to volatility and Powell’s remarks

While Powell’s words may have been delivered in a measured tone, their content held significant weight. The market’s positive response primarily resulted from a decrease in implied volatility, analogous to what transpires following most Federal Reserve meetings. The implied volatility contraction occurred later in this instance, but it was a prominent factor influencing the rally, as exemplified by the VIX’s one-day movement.

Amid volatility S&P 500 surpasses 4200

The S&P 500 Index has shown remarkable strength by returning and crossing over its resistance around the 200-day moving average at about 4,250. Thus signifying a formidable challenge for the index has been overcome for the time being at least.

US dollar’s consolidation

The US dollar exhibited stability and continues to consolidate, forming a potential bearish pattern that could signal a downward movement in the dollar index. To support an uptrend, incoming data will play a pivotal role especially the CPI.

Retracement in US 10-Year rates

The 10-year Treasury yield had been on an upward trajectory but experienced a reversal following recent developments, including Treasury refunding, JOLTS and NFP data releases. This reversal likely prompted shorts to cover their positions. In the absence of significant upward movement in rates, it’s conceivable that another retracement below 4.6% may occur.

A rebound or trend reversal?

Rally in stocks has nothing to do with the Fed; it has to do with the mechanics of the bond market, not policy. As the 10-year rates pulled back from their recent highs, we don’t think the issues that brought the S&P 500 to 4,100 have passed.

Could Rates Keep Rising?

Whether the 10-year and 30-year are done with rising is unknown. We will still be looking at CPI and the oil prices due to the ongoing Israel-Hamas tensions in the Middle East. The yield curve should keep steepening.

The financial landscape remains influenced by the interplay of data, Fed policy and the Middle East dynamics, as evident in the S&P 500’s journey through recent resistance levels.

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