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Fed Raises Interest Rates by 25 Basis Points, in Line with Expectations, Adopts Less Hawkish Guidance

Dollar Correlation to Fed Outlook Inverted, Google Focus Amplified by Facebook, Tesla

Dollar Correlation to Fed Outlook Inverted, Google Focus Amplified by Facebook, Tesla

John Kicklighter,
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S&P 500, Tesla, Facebook, Google and Dollar Talking Points

  • The S&P 500 and Dow charged to record highs Monday while the Nasdaq 100’s is still tracking short of its own all-time high
  • Tech interest has been charged to start the week with a favorable afterhours Facebook earnings response and news of a record Tesla order from Hertz
  • Event risk waters will grow more turbulent in the coming 48 hours as earnings is interspersed with key event risk, central bank decisions and GDP anticipation
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S&P 500 and Dow Mark Yet Another Record High

Last week ended with a controversial technical picture for the benchmark S&P 500 as a spinning top that fell level with the early September high seemed to offer as much indecision as it did conviction for the bulls. The deciding factor was – and is – the depth of critical event risk on tap through the coming week from key tech earnings to rate speculation to updated growth forecasts. Those milestones are still on the horizon and anticipation is palpable, but expectation doesn’t prevent the markets from progressing. As many market participants hold to the sidelines to see key event risk update, we found the remaining speculative rank hone in on active headlines for US corporations. A commanding rally from Tesla certainly earned the core indices good will – particularly those already at record highs. The Nasdaq 100 notable posted a 1.0 percent rally even if it didn’t notched a record while the S&P 500’s 0.5 percent climb did restore a new peak. As always, the question is intent and potential. If Tuesday’s New York open rides a wave on the back of Facebook (despite its troubles), it could readily carry into Google afterhours and keep a run of earning’s fed gains. That is the ideal scenario for bulls, however, and I don’t go in expecting best or worst case scenarios.

Chart of SPY S&P 500 ETF with 50-Day SMA, Volume and Consecutive Candles (Daily)

Chart Created on Tradingview Platform

Tesla and Facebook: Very Different Stories but Both Gains

As we await the macro fundamental tide to role in, the focused headlines from Corporate America are making a serious impressive. Tesla, the 7th most heavily weighted component of the S&P 500, commanded the day for trading headlines this past session by surging nearly 13 percent to record highs on the heaviest volume in 7 months on news that Hertz, the rental compony recovering from its bankruptcy last year, had put in a bid for 100,000 units of TSLA’s Model 3s. It was further posting a request for software adjustments and plans to build out charging stations in its effort. That is a huge boost for the EV maker heading into the COP26 meetings amid the growing concern around global climate change. Naturally, this ‘fan favorite’ among newer investors was the top reference in Reddit Boards (Wall Street Bets) and volume was a healthy 62.8 million shares.

Chart of Tesla with 50-Day SMA and Volume (Daily)

Chart Created on Tradingview Platform

Facebook’s backdrop was a very different affair Monday, but it ultimately still ended with the same color candle. The social media company has been battered in the media after a whistleblower came forward to expose claims that the controversial firm was pursuing profit over the safety and sanity of the populace – something that it has been accused of many times over the years. With international investigations intensifying, we were also heading into the company’s earnings due shortly after the bell Monday afternoon. In what has become an expected mix, the company missed on revenues with $29.01 billion falling short of the $29.45 billion expected while the GAAP massaged EPS beat at $3.22 against a $3.17 forecast. That alone would likely have led the market to the same kind of response as SNAP and INTC met last week, but for the fact that FB has been under pressures for some weeks and the company would also announce a large $50 billion share buyback. We’ll see how long this purchased good will lasts – if even to Tuesday’s open – but I wouldn’t rely to heavily on this carrying forward bullish interest.

Chart of Facebook with 50 and 200-Day SMAs Overlaid with Google (Daily)

Chart Created on Tradingview Platform

The Fundamental Charge Ahead

As far as themes go, US earnings will still represent the most consistent fundamental trough for which the market can draw from, but don’t expect it to simply support a consistent speculative bearing. I am particularly interested in the afterhours updates from Google, Microsoft, AMD and Twitter following the New York close Tuesday; which can cater to a very active afterhours trading market. Yet, looking further ahead, it is important to give the proper respect for the market amplitude of the key event risk a little further along the timeline. Monetary policy is a big consideration this week with the Bank of Canada (expected to hike 100bp over the coming year) and Brazilian Central Bank Decision (expected to hike 100bp at this meeting), but there are contributing factors like the UK Autumn budget and Australia consumer inflation on tap. Governmental GDP stats are another pillar of expectation with the US 3Q growth report due a little further out on Thursday. Event risk can render different market outcomes depending on the performance of the data, but anticipation can uniformly waylay charges.

Calendar of Major Macro Event Risk for the Week

Chart Created by John Kicklighter

Shifting the focus from the second half of the week to just Tuesday trade, there are a few economic indicators on tap that are worthy of traders’ attention. While South Korea’s 3Q GDP is interesting and US housing data speaks to a deeper concern across the globe, the Conference Board’s US consumer confidence survey is top listing on my docket. While this measure carries far less weight than the BEA’s broad growth report on Thursday, it is far more timely in a period of critical transition where growth is leveling out and central banks are trying to back out of their critical roles.

Chart of S&P 500 Overlaid with US Consumer Sentiment (Monthly)

Chart Crated by John Kicklighter with Data from Conference Board

The Dollar and Fed Funds Futures…An Inverse Correlation

It was perhaps inevitable, but interest rate expectations for the Federal Reserve took a breather to start the week. Through Friday’s peak, we had gotten to the point where the market was essentially pricing in two, full rate hikes from the central bank through the coming year – swaps are insinuating a more aggressive pace still. This forecast is significantly more aggressive than what the Fed itself has projected, so there is an uncomfortable disparity that will need to eventually be closed. Yet, with the pullback in rate forecasts, mild as it may be, the Dollar seemed to respond distinctly with a bullish trading day. I don’t think this is really a like-for-like move, but there is no denying the 10-day correlation between rate forecasts and the Greenback with a sharp, negative relationship. One may conclude that fundamentals are totally upended, but I believe this is more a reflection of the collective shift in global monetary policy and the Dollar’s competing influences such as its safe haven status.

Chart of DXY with 50-Day SMA, Overlaid with Fed 2022 Forecast, 10 and 60-Day Correlation (Daily)

Chart Created on Tradingview Platform

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