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FOMC preview: preparing a pause and what it means for US equities

As the Federal Reserve is expected to signal a pause in rate hikes, the question remains whether strong earnings reports will continue to support the market, or will it leave investors searching for the next catalyst?

Source: Bloomberg

In some ways, we shouldn’t be surprised. Like the March FOMC meeting, the lead-up to Thursday’s FOMC board meeting has featured another banking failure.

However, the swift and tidy resolution around First Republic Bank this week has created none of the uncertainty seen ahead of the last FOMC meeting.

Instead, the interest rate market and commentators expect the Fed to deliver a 25bp rate hike, raising the target range of the Fed Funds to 5-5.25%. The real focus will be on if and how the FOMC adds some flexibility ahead of a possible pause in June.

What is expected?

The FOMC is expected to signal a pause and retain a tightening bias using wording similar to the RBA used for its pause in April - noting that the timing and size of future rate hikes will depend on incoming data and information.

The Fed will also note that interest rates will likely remain high for an extended period which contrasts with the rates markets pricing of 50bp of rate cuts from September into year-end.

What does a pause mean for US equities?

Historically US equities have typically rallied after a Fed pause. However, each cycle is different.

US stock markets have rallied strongly from their October lows in anticipation of an imminent Fed pause which led to the interest rate-sensitive Nasdaq ruling off on its best quarter since June 2020. Hence there is a good argument to say that a Fed pause is already priced in.

The Fed is unlikely to open the door to possible rate cuts this year which could have been the catalyst for another leg higher. Instead, as explained above, they will note that rate hikes will remain high for an extended period.

Perhaps the wild card in all of this is that the run of strong US earnings either continues or runs out of steam over the next fortnight.

According to FactSet of the 53% of S&P 500 companies already reported, 79% have reported a positive EPS surprise, and 74% have reported a positive revenue surprise, pushing back expectations of an earnings recession.

S&P 500 technical analysis

The S&P 500 is trading at the top of its multi-month 4210-3800 range. While below range highs 4210/00 area, we continue to look for a test of 4000 and then 3800 in the months ahead.

However, should the S&P 500 see a sustained break above 4210 (three daily closes above), it will put the August 4327 high on the market’s radar.

S&P 500 daily chart

Source: TradingView

Nasdaq technical analysis

After a storming run across the finish line, the Nasdaq ended the month of April in positive territory (+0.49%) after holding and bouncing from important support highlighted at 12,800.

Should the Nasdaq continue to hold the support at 12,800 and then see a sustained break above the recent 13,348 high, it would set up a retest of the August 13,740 high.

Aware that if the Nasdaq were to fail from here and then see a sustained break below 12,800, it would signal that a deeper pullback is underway towards 12,400 with scope to the 200-day moving average at 12,100.

Nasdaq daily chart

Source: TradingView

Dow Jones technical analysis

The Dow Jones completed April with a 2.5% gain for the month, posting a bullish close above the downtrend resistance from the bull market 36,952 high.

If the Dow Jones can now take out the 34,342 high year-to-date high, it opens a test of the 34,712 high from December 2022 with a scope to the 35,492 high from April 2022.

Aware that a retreat much below 32,000 would suggest the Dow Jones's latest attempt to break higher has failed and that a deeper decline towards support at 32,670 (from the 200-day moving average) is underway.

Dow Jones daily chart

Source: TradingView
  1. TradingView: the figures stated are as of May 2, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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