S&P on the edge after Powell-inspired drop

• US futures little-changed after Tuesday’s drop
• Powell re-ignited hard-landing, rate hike fears
• Short-dated bond yields extend rise
• S&P bulls in trouble if Friday’s low breaks

Markets calmed down a little in the first half of Wednesday’s session, with European markets a touch higher and US index futures flat following a mixed session in Asia where Japan’s Nikkei rose, and Chinese markets fell. Sentiment remained cagey, though, as traders awaited the release of more US data and Jerome Powell’s second day of testimony before the Senate banking committee.

All eyes on US data until FOMC meeting

US ADP payrolls and JOLTS job openings are in focus, with FX traders also keeping an eye on the Bank of Canada rate decision. For everyone else, much of the focus will be on rising yields and the above-mentioned economic pointers, as well as those coming up in the days ahead, to gauge the strength of the world’s largest economy and guestimate the Fed’s next moves. That’s because Powell noted the upcoming policy decision on March 22 will be shaped by key economic releases for February. On Friday, we will have the all-important non-farm payrolls report. Next week, we have US CPI data on Tuesday March 14 with retail sales to follow the next day.

Hawkish bets jumped after Powell spoke

The Fed Chair sent everything plunging on Tuesday after warning that the central bank could ramp up the pace of rate hikes and could keep a tight policy in place for longer. This sent the odds of a 50 basis point rate hike for the March 22 meeting to above 70%, according to the CME FedWatch tool. The market was previously pricing in 25 basis points for this meeting. The terminal interest rate is now expected to climb closer to 6% than closer to 5% expected at the end of January. Short-ended yields have correspondingly risen as the Fed continues to front-load rate hikes.

2s10s at deepest inversion in 40 years

The 2-year treasury yield rose to over 5% for the first time since 2007. This further inverted the spread between the 2- and 10-year bond yield. This so-called 2s10s dropped beneath -100bps, its deepest inversion since the 1980’s. In other words, bond markets are now expecting that the US economy will suffer a hard landing, and that the Fed is potentially making a policy error, as they are seen reversing the rate hikes late in the year or start of 2024.

Fed Chair Powell’s tone was significantly more hawkish than at the January meeting when Powell spoke about the disinflation process. 

Source: StoneX and TradingView

S&P make possible bearish reversal

After hitting a wall of resistance around 4050 to 4070, the S&P dropped sharply after Powell spoke on Tuesday to send it back down to the base of the prior breakout around 3980 to 3990 area. The first level of support that needed to hold was at 4000, but the selling pressure was too strong on Tuesday for the index to find any meaningful support there. Instead, it ended the day printing a possible 3-bar reversal pattern on the daily chart.

It is all about follow-through now. A move below 3970 – the low from Friday – could ignite fresh technical selling towards the 200-day average around 3939 next. Last week’s low comes in around 3920. Big stops will surely be resting below this level now. So, this would be the main objective for the bears to get to, next.

For the bulls, well they must reclaim 4050 in the next few days to erode the bearish control again. To do that, support will need to hold around current levels, for a move below Friday’s low at 3970 – as mentioned – could trigger fresh liquidation of the weaker hands.

Source: StoneX and TradingView

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R