The S&P 500 index is trading lower today, on the back of the downside seen on several financial stocks.
The focus of the markets this Wednesday is on the FOMC, with a dovish statement widely expected. The Fed’s balance sheet has nearly doubled since it recommenced an expanded stimulus program in March 2020. Of specific interest is the economic projections report of the Fed, which will come under scrutiny as traders seek to find out how long the stimulus measures will remain in place. This question has arisen as a result of Friday’s NFP report, which staged a positive market surprise. Whether this will impact projections going forward and as a consequence, further Fed actions remains to be seen.
The consensus among many analysts is that the US markets are running on the stimulus and not on economic fundamentals. The Fed would be keen on keeping interest rates as close as they can towards zero. One of the tools the Fed may deploy in this regard is buying short-maturity bonds at the expense of long-term maturity bonds, as a way to ensure that the short-maturity bonds carry higher yields than the long-term bonds. Whether such yield control will be deployed in the near-term, as well the target points of such a yield curve control measure, are things that investors will be watching for in the statements and press conference.
The markets expect a dovish Fed: maintaining or expanding the stimulus programs. This stance could be positive for the markets, and we could see the S&P 500 recover towards the 24 February 2020 high at 3257.8. Further advance allows the index to target the 24 January high at 3335.5.
A pullback towards the 3137.0 and possibly the 3028.3 support line could result if there are indications from the Fed statement and economic projections that it may start rolling back some of the programs earlier than the markets would be expecting. Some lawmakers in the US are already pushing the narrative that reopening of the economy would spur recovery.
However, businesses in many reopened economies are still struggling, which shows that reopening does not equate to recovery. The odds favour a dovish Fed; a hawkish statement would be a surprise.