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S&P 500 Seesaws After Hawkish Fed Minutes, Stock Market Fate Tied to Inflation Data

S&P 500 Seesaws After Hawkish Fed Minutes, Stock Market Fate Tied to Inflation Data

Diego Colman, Strategist

SEPTEMBER FOMC MINUTES KEY POINTS:

  • The Fed minutes from the September meeting reiterate that policymakers remain resolute on the need to make monetary policy more restrictive
  • The S&P 500 pushes into positive territory after the FOMC minutes cross the wires, but bullish momentum is weak
  • All eyes will be on the September U.S. inflation report on Thursday, with the data likely to determine the near-term directional bias for stocks

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Most Read: S&P 500, Dow Jones, Nasdaq 100 Technical Outlook for the Days Ahead

The Federal Reserve this afternoon released the minutes of its September meeting, at which the bank implemented the third consecutive three-quarters point interest rate increase and pledged to return monetary policy to a "sufficiently restrictive" stance to restore price stability.

Several Fed officials have spoken in recent days to share their views on the tightening roadmap and inflation risks, so the summarized record of the last FOMC conclave didn't contain many surprises or provide new details that Wall Street didn't already know.

In any case, the minutes reinforced the prevailing message that policymakers will remain committed to an aggressive hiking path and will not change course until they see clear and convincing evidence that the underlying drivers of above-target CPI readings are beginning to materially fade. This means that the bar is very high for a “policy pivot” at this time.

Here are some of the highlights from the Fed minutes:

  • Fed officials favor reaching a restrictive posture in the near term amid “unacceptably high inflation”
  • Several members see the cost of taking too little action as higher than delivering a stronger response
  • Participants believe it would be appropriate to slow the pace of tightening at some point
  • Several policymakers saw the need to calibrate the tightening cycle to mitigate unwanted risks
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Related: How Does Monetary Policy Impact the Forex Markets?

The document’s hawkish tone suggests that the bank is prioritizing its fight against inflation over economic growth and, therefore, may be prepared to deliver another supersized 75 basis point hike at its November gathering if conditions warrant further front-loaded action.

Investors and traders will have a clearer picture of what to expect in terms of monetary policy tomorrow after the U.S. Bureau of Labor Statistics releases the September consumer price index report. Annual headline inflation is forecast to moderate to 8.1% from 8.3%, but the core gauge is seen accelerating to 6.5% from 6.3% previously, matching the cycle’s high set in March.

For sentiment to recover and stocks to mount a meaningful recovery, the data has to surprise on the downside in a way that reduces pressure on the Fed to step up the pace of rate rises. In-line or above-estimate numbers could unleash a sell-off on Wall Street, as happened last month, when hotter-than-anticipated August CPI results sent the S&P 500 tumbling about 4.2%.

MARKET REACTION TO FED MINUTES

Immediately after the Fed minutes crossed the wires, the S&P 500 pushed higher into positive territory, as the summarized record of the last FOMC meeting failed to deliver any new hawkish bombshells. With several speeches from central bank officials over the past few days, the minutes did not provide any new information. Despite the somewhat favorable reaction from equity markets initially, the outlook remains bleak for both the S&P 500 and Nasdaq 100 on the back of rapidly slowing economic activity, rising borrowing costs and heightened financial risks, but we should have a better idea of the near-term trend tomorrow after analyzing the September CPI numbers.

S&P 500 FIVE-MINUTE CHART

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S&P 500 Chart Prepared Using TradingView

US 500 Bullish
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Change in Longs Shorts OI
Daily -3% 4% 1%
Weekly -16% 19% 1%
What does it mean for price action?
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---Written by Diego Colman, Market Strategist for DailyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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