Rates on Watch as Stocks, USD Pull Back Ahead of the Fed

USD, S&P 500, Nasdaq 100, Rates Talking Points:

• Today’s Fed meeting isn’t expected to bring any actual changes to policy, but it does lead into the final FOMC meeting for the year and the Fed has recently said that they expect one more hike.
• Markets are dovish for next year and this remains a sticking point for the Fed. The 10 year Treasury note has recently hit a 15-year high at 5% and that’s seemed to soften the sell-off a bit.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

We hear from the Fed at 2PM ET today and this will set up for an interesting final FOMC meeting to finish the year. There are scant expectations for any actual moves today, but far more pressing will be the tone delivered by the bank at this meeting. There remains a 25.2% probability for another hike this year and given that there’s only one meeting left, that would mean expectation for the December rate decision.

Beyond that, there are wide expectations for cuts next year with a mere 4.3% probability that rates will be at current levels or higher by the end of 2024. This isn’t entirely out of the blue as the Fed has continued to forecast that cuts will begin next year; but they have moderated that stance a bit of recent and markets appear to be more optimistic than what the bank has projected. The Fed has recently forecast two cuts for next year and markets are assigning a 24.1% probability of that, as of this writing. The bulk of expectations are pricing in three rate cuts and this is something that can take a toll on bond markets if Jerome Powell excites markets with hawkish talk at today’s press conference.

FOMC Rate Probabilities to the End of 2024

Treasury Yields

FOMC meetings have been especially impactful to a very important market of late with US Treasuries. After meetings in January/February, 10-year yields softened, and this happened again in March.

But the past two rate meetings have been especially impactful and on the below chart I’ve marked each FOMC meeting this year along with the day after to further associate the reaction. The 10-year has put in a sizable movement since the last FOMC rate decision. At the time 10-year notes hadn’t yet touched 4.5%, and last week they shot all the way up to 5%.

US Treasury 10 Year Yields (indicative only)

Chart prepared by James Stanley; data derived from Tradingview

On a longer-term basis, it’s the 5.25% level that’s notable as this was traded twice in the past twenty years, and each instance was aggressively bought. The last test above 5.25% produced a high in 2007 that hasn’t yet been re-tested. That then led into an aggressive bull market in bonds as the Fed hurriedly cut rates through the financial collapse, and this created demand in Treasuries from multiple fronts:  investors were looking to lock in higher yields before rates fell further, which helped to stoke bond prices higher. And this also offered the relative safety of US Treasuries as stock prices were falling aggressively.

If we do see this theme of bond weakness to continue that becomes a very interesting level to plot for a possible inflection point.

US 10 Year Treasuries – Monthly Chart (indicative only)

Stocks

There still could be bullish scope for stocks, but today’s rate decision and the ensuing market reaction will be key for whether this door remains open or not.

Stocks have been hammered since around the July FOMC rate decision. This was the meeting where Powell shared that the bank is no longer expecting a recession and perhaps ironically it was about a week later when the S&P 500 began to turn over.

That weakness in equities has hung around for the past three months and last week seemed especially brutal with both the S&P 500 and Nasdaq 100 testing below major spots of long-term support.

Equity markets have pulled back aggressively since the July rate decision and last week was especially brutal, as there was the break of a bear flag formation, and the S&P 500 finished the week at fresh six-month-lows. So far this week we’ve seen pullback in that theme as the index works on its third consecutive daily gain, but there’s also a resistance test at a prior spot of support, which can keep the door open for bears around today’s rate decision. Sitting overhead are some major points of resistance, at 4235, 4277 and then 4335.

S&P 500 Daily Chart (indicative only)

Nasdaq 100

The Nasdaq similarly came into last week with a bullish setup, as price was testing a big spot of longer-term support while holding into a falling wedge formation. The formation was nullified with a downside breakout, however, and prices closed at a fresh five-month low last week. Similarly, prices have pulled back for a test of resistance at prior support. As of this writing, price is testing resistance at the prior June low, and there’s another spot of interest a bit higher, plotted around 14,890. Above that, the 15k level looms large and if bulls can get back up there in short order, especially if driven by the net outlay at today’s rate decision, that could make the prospect of a Santa Rally look more attractive.

Nasdaq 100 Daily Price Chart (indicative only)

USD: Can Bulls Force the Break?

The US Dollar has had a full head of steam since July and that July rate decision at the Fed only seemed to douse fuel on the fire. The currency came into October holding on to a strong bullish trend, but finally found some resistance at the 50% mark of last year’s pullback move in early-October, and since then bulls have been stalled.

This hasn’t been without effort, however, as there’s been some strong bullish responses that have simply fizzled out. A few weeks ago, after CPI saw bulls force a strong reaction but resistance held at 106.67-106.79 and price pulled back. Last Tuesday produced another strong bounce but, similarly, bulls were thwarted at that same spot of resistance. And then yesterday produced a very strong reaction on the final day of October, which led to a bullish monthly bar.

From the daily chart below, we can see this continued congestion near resistance, with the big question as to whether Powell and the Fed will fuel another breakout at today’s meeting.

US Dollar - DXY Daily Price Chart (indicative only)

EUR/USD 1.0500

In a related matter to the US Dollar scenario above, the Euro makes up 57.6% of the DXY quote and the currency pair has continued to show stall at the 1.0500 handle over the past month. Bulls have been almost begrudgingly pushing prices higher along a channel for much of that time and notably, there hasn’t yet been a daily close below that bullish channel, which makes up a bear flag formation.

The past four daily bars have seen tests below this channel – but as of this writing there hasn’t been a daily close below it, which keeps the door open for bounce potential as we move into today’s rate decision, and this could have a bearish input on the DXY scenario looked at above if the channel does remain alive through today’s close.

EUR/USD Daily Price Chart

--- written by James Stanley, Senior Strategist