S&P 500 Talking Points
The S&P 500 index trades to a fresh monthly high (4463) as it extends the advance following the Federal Reserve rate hike, and the improvement in risk appetite may keep US stock prices afloat over the coming days as the central bank appears to be in no rush to winddown its balance sheet.
Fundamental Forecast for S&P 500: Neutral
The S&P 500 index clears the monthly opening range for March even as the Federal Open Market Committee (FOMC) delivers a 25bp rate hike as the central bank expects “to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”
It seems as though the FOMC will follow a predictable path in normalizing monetary policy as the committee pledges to “avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment,” and it remains to be seen if the committee will winddown its balance sheet ahead of its next quarterly meeting in June as “the American economy is very strong and well positioned to handle tighter monetary policy.”
Until then, swings in investor confidence may sway equity prices as the FOMC refrains from quantitative tightening (QT), but the recent recovery in the S&P 500 may turn out to be a correction rather than a resumption of a bullish trend as the update to the Summary of Economic Projections (SEP) indicates that the central bank will deliver a series of rate hikes over the coming months.
Source: CME
As a result, the CME’s FedWatch Tool shows a 100% probability for at least another 25bp rate hike at the next rate decision May 4, with a 40% chance of seeing the Federal Funds rate increasing to 0.75% to 1.00% from the current threshold of 0.25% to 0.50%.
In turn, the risks posed by the Russia-Ukraine war along with the shift in Fed policy may produce headwinds for the S&P 500 index as Chairman Jerome Powell and Co. see the Federal Funds rate around 2.00% in 2022, and the change in regime may continue to curb risk appetite as the FOMC is “determined to take the measures necessary to restore price stability.”
With that said, recent price action raises the scope for a larger recovery in the S&P 500 index as it breaks out of the opening range for March after reversing ahead of the yearly low (4105), but the advance from the monthly low (4138) may turn out to be a near-term correction with the Fed on track to reduce its balance sheet over the coming months.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
