S&P 500 continues to hover above bear market territory as FOMC minutes loom

S&P 500, Inflation, Federal Reserve, FOMC – Talking Points

  • The S&P 500 remains below resistance around 3980
  • FOMC minutes set to drop at 4:00 p.m. GMT
  • Minutes can offer more clarity on QT, balance sheet trajectory

The S&P 500 continues to perch just above bear market territory as market participants eagerly await the release of the FOMC minutes. Markets have been jittery lately, as financial conditions have tightened considerably in just the past few months. The fall in risk assets peaked with the S&P trading in bearish territory on an intraday basis last week, but we have yet to close below this threshold. The macroeconomic climate remains the focus of attention for many, with Snapchat’s revised forecast yesterday stoking fears over growth and a possible recession.

After a weak impression of durable goods in the pre-market session, followers of the economic calendar are now turning their attention to the release of the FOMC minutes at 16:00 GMT. With the market having effectively priced two consecutive 50 basis point hikes from the Fed, the minutes could go a long way in decoding the predicted trajectory for the balance sheet reduction. At the May meeting, the FOMC revealed that starting June 1, the balance sheet would be reduced at a rate of $47.5 billion per month, eventually reaching $95 billion after 3 months. With questions still looming over the Fed’s MBS (mortgage-backed securities) holdings, any clarity on potential MBS sales going forward may be critical.

S&P 500 (ES) 1-Hour Futures Chart

Chart created with TradingView

S&P 500 (ES) futures have been choppy lately as tighter financial conditions continue to weigh on major U.S. equity benchmarks. For much of the past week, the price of 3960 held steady except for some minor overshoots. As liquidity continues to tighten and the Fed adopts a neutral policy, the outlook for risk assets remains bleak. It looks like we remain firmly in a “sell the rally” environment with every late bounce fading in the following sessions.

That being said, the S&P 500 could rebound from current levels given that positioning and sentiment are too bearish. The 3800 area represents the 0.618 Fibonacci retracement of the March 2020 to January 2022 ramp to all-time highs. This could allow for a near-term relief rally, but ultimately the bottom may not be reached until (or if) the Fed “blinks” and pivots on policy. In the short term, the S&P 500 could continue to oscillate in the range we cut between 3860 and 3960.

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— Written by Brendan Fagan, intern

Contact Brendanuse the comments section below or @BrendanFaganFX on Twitter

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