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KR Opinion
As we approach the final hours before the Federal Open Market Committee (FOMC) meeting, market activity continues to be constrained within a narrow trading range between 5160 and 5240, resembling a pattern of stagnation. There appears to be no significant momentum to propel us out of this trading band.
Given the lack of anticipation for major policy shifts by the Federal Reserve in the upcoming meeting, Wednesday's market behavior is expected to mirror that of recent sessions. However, it is noteworthy that Chairman Powell's press conferences often incite market volatility through direct responses or as trading algorithms react to perceived signals, leading to temporary fluctuations within the day.
In my analysis, I maintain that the prevailing sentiment anticipates an upward trajectory for the markets as we head towards June and July, contingent upon the Federal Reserve's decisions in its April and June meetings. Should the Fed choose not to act during these meetings, it may face criticism for perceived political motivations, especially with the general election on the horizon in November.
Regarding recent market dynamics, NVIDIA experienced significant volatility, initially dropping by nearly 4% before rebounding to close with gains. This pattern was emblematic of broader market behavior, where investors bought on dips, possibly as a pre-emptive measure ahead of the FOMC meeting, despite the absence of other noteworthy developments.
Looking ahead, I expect the market to continue its sideways movement, albeit with a slight bias toward an upward trend influenced by the Federal Reserve's ongoing discussions. Additionally, the Reserve Bank of Australia's recent statement may serve as a precursor to the Federal Reserve's forthcoming announcement, suggesting minimal market reaction beyond short-lived spikes in volatility.
In the technical analysis section, I will delineate critical levels to monitor for potential breaches above or below the current market range. Preliminary algorithmic analysis indicates a slight bearish tendency as we approach Wednesday, underscoring the importance of vigilance in the face of impending market shifts.
Looking Back on Tuesday’s Action
Initially experiencing a downturn, the stock market concluded the day on a positive note. The significant factor influencing this shift was NVIDIA (NVDA), which initially saw a decrease of up to 3.9% following the announcement of its Blackwell AI platform at the GTC Conference.
This initial decline was a reaction to selling the news, but subsequently, NVIDIA rebounded, ending the day with a gain and thereby contributing to a broader market recovery. This recovery was further supported by short-covering activities and a general apprehension among investors about missing out on additional gains, leading the S&P 500 to reach a new record closing high.
The market's upward trajectory was widespread, with nine out of eleven S&P 500 sectors finishing in the green. The real estate sector remained stable, while the communication services sector experienced a slight decline. The energy sector, buoyed by an increase in WTI crude futures, emerged as the top performer, closely followed by the utilities sector, which benefited from rate-sensitive gains.
In the bond market, yields on the 2-year and 10-year notes dropped despite positive data from housing starts, building permits for February, and significant policy shifts by the Bank of Japan (BOJ). The BOJ exited its negative interest rate policy, ended yield curve control, and stopped its purchases of ETFs and REITs, positively impacting the Treasury market.
The BOJ's policy adjustments led to a sharp yen depreciation against the dollar, even as the BOJ maintained a low policy rate and a commitment to an accommodating monetary stance. This resulted in a 1.2% rise in the USD/JPY pair and a 0.4% increase in the U.S. Dollar Index.
Market attention is now turning towards the upcoming Federal Reserve (Fed) decision, expecting the target rate to remain unchanged. Investors are keenly awaiting the Fed's dot plot for insights into potential rate cuts this year.
The tone adopted by Fed Chair Powell during his press conference is also highly anticipated, especially in light of previous projections suggesting three rate cuts by the end of 2024. Any deviation from these expectations could introduce a new element of surprise for traders.
Reviewing today's economic data:
- Housing starts increased by 10.7% month-over-month to a seasonally adjusted annual rate of 1.521 million, surpassing the KR Forecast Review prediction of 1.435 million. This follows an upward revision for January's figure from 1.331 million to 1.374 million.
Building permits increased 1.9% month-over-month to a seasonally adjusted annual rate of 1.518 million, also above the KR Forecast Review's estimate of 1.485 million, up from an unrevised 1.489 million in January.
- The key takeaway from the report is the acknowledgment that unusually cold weather in January suppressed housing activity, leading to a significant rebound in February. This rebound is expected to support the market's optimistic outlook for a soft landing or no landing scenario for the economy.
Wednesday's economic schedule
The day starts with the weekly Mortgage Bankers Association's Mortgage Applications Index, which previously showed a 7.1% increase at 7:00 a.m. ET.
10:30 a.m. ET, the weekly EIA crude oil inventories data will be released, with the prior week showing a decrease of 1.54 million barrels.
The day's highlight will be the Federal Open Market Committee (FOMC) decision and the Summary of Economic Projections, set for 2:00 p.m. ET. Shortly after, at 2:30 p.m. ET, Fed Chair Powell will hold a press conference.
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