S&P 500, FOMC, Dollar, USDCNH, GBPUSD and USDJPY Discussion Topics:
- The Market Perspective: USDJPY Bears below 141.50; gold Bears below 1,680
- Fundamental rates will rise exponentially over the next week, but it is too simplistic to assume that FOMCA political decision on Wednesday will easily drive the entire market
- Monetary policy is a systemic threat to market stability moving forward, but beware of downstream risks to overall economic health (such as recession fears)
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Risk is reduced ahead of a tough week of event risk
Next week there is a danger of serious events. The kind of fundamental charge that can not only increase volatility, but potentially redefine trend definition. The main one is the anticipation of monetary policy – led by the US central bank, but supplemented by a host of policy groups from developed countries and emerging markets that go hand in hand. While many macro traders can be drawn into the relative performance of one currency or asset region compared to another, I believe there is more systemic risk at play here. In the aftermath of the Great Financial Crisis (GFC) in early 2009, there was concerted risk-off, driving market participation to ever greater extremes. As it becomes clear that the Fed and its global counterparts are not going to intervene as insurance against speculative losses, the potential for a total collapse will remain exceptionally high. I will be watching S&P 50 for the coming week, but the June low is still a long way off. It will be difficult to reverse the overall picture of the speculative bearing unless the benchmarks lead the way.
S&P 500 chart with volume20 and 200 Day SMA with COT Net Spec Positioning (Daily)
The chart is created on Tradingview platform
In line with risk trends moving forward, we have both seasonal and unique systemic circumstances to contend with. In terms of seasonality, expectations are very high going forward. Typically, September is known for peak volatility that extends into October, while participation (as measured by S&P 500 volume) begins to pick up. Of course, the main point most traders will focus on is that this month saw the only loss in a calendar year when averaging back to 1980. This does not mean that we “should” suffer a decrease, but there is a statistically significant performance. Breaking down market habits to a weekly cadence, the 38th week of the year we’re approaching has averaged its second of three-week slides, but the scale of the losses has been largely contained. Overall, volatility expectations are well established historically, creating a strong backdrop for significant monetary tightening and recession fears.
Chart of S&P 500 historical weekly averages from 1900 to present
Chart created by John Kicklighter
The FOMC and its peers present an open fundamental theme this week
Over the coming week there was the only fundamental risk to watch more closely than its peers, interest rates will be the dominant theme given the register we are facing. At the very top of the list of market drivers we have the FOMC rate decision at 18:00 GMT on Wednesday. While there are some significant updates to the event, nothing comes close to the global reach and intensity of the US central bank’s rate decision. There is a healthy debate as to whether the next hike will be a 75 basis point move or a 100 bp move. (80/20 percent last week), but the move will be significant either way. While there is considerable interest in how big the world’s largest central bank will go at this month’s meeting, perhaps there is more strength to be found in the expectations that lie ahead. Given that this is one of the “quarterly” policy meetings, forecasts in the form of a Summary of Economic Outlook (SEP) will be a critical risk event. Is a year-end forecast in the market range of 4.25-4.50 reasonable? The Fed’s views will help gauge these future projections.
The risk of a critical macro event in the global economic calendar for the next week
Calendar created by John Kicklighter
To take a closer look at the FOMC’s decision on Wednesday, the first assessment that will need to be made is whether the central bank will increase rates by 75 or 100 basis points. Futures suggest a third consecutive rate hike of three-quarters of a percent is the most likely outcome by a wide margin. While this would be a remarkable achievement for the world’s largest central bank, it would be well appreciated by speculators who monitor inflation and Fed rhetoric. It’s possible that such a result could be interpreted as “disappointment” for the dollar and “welfare” for measures of risk such as the S&P 500. Relief is an appropriate term for such a reaction, but a full run will be more than difficult to stir. Beyond the rate decision, the Fed’s forecasts will be consistent with both rate forecasts and those expecting a death sentence in the economy with major peers facing official recessions.
September 21 FOMC schedulestr The outcome of the Fed futures decision
Chart from Fedwatch CME
All roads lead to the threat of economic decline
While the Fed’s rate decision can easily be interpreted as a completely restrained relative impact of monetary policy on the dollar and other related assets, I’m more concerned with the overall risk perspective. The past decade has seen a steady build-up of speculative exposure, aided by extremely accommodative monetary policy from the world’s leading central banks – simultaneously reducing risk and suppressing the tangible rate of return on the traditional portfolio. If warnings from the Fed and others that their efforts to contain inflation take precedence over recession and market doldrums bear fruit, that admission could pose a serious challenge to speculative defenders.
Chart of the S&P 50 overlaying the aggregate stimulus of the major central banks on a monthly basis)
The chart is created John Kicklighter with data from the Federal Reserve Economic Database
Closing the monetary policy of economic weakness has been a major concern of mine for the past eight years. Despite the sharply weakened economic response to subsequent waves of stimulus from the Fed and others at the time, central banks refused to ease their support lists. The stimulus we’ve seen in the markets since then has done more to fuel speculation than strengthen the global economy. The problem is that the market itself recognizes this bias. So what happens when an official recession is registered? So far, the NBER’s change in definition has won time for that call, but there are other measures that raise concerns. Adding some weight to the inversion of the Treasury yield curve and oil demand signals last session, the CEO of global transport company FedEx announced that the company’s forward-looking forecasts should be sharply reduced due to economic struggles in Europe and Asia. It has been pushed to suggest a “global recession” signal, but the concern should resonate nonetheless.
FedEx Stock Price Chart Overlaid on US 10-2 Year Yield Spreads (Daily)
The chart is created on Tradingview platform