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In response to Fed Chair Jerome Powell’s speech to the Senate Banking Committee that the final fed funds rate “is likely to be higher than previously expected,” the S&P 500 fell more than 1.5% yesterday.
If U.S. indicators continue to indicate that such a trajectory is justified, the FOMC, which will convene later this month, may be “prepared to increase the pace of rate hikes,” Powell said.
The FOMC estimated that the terminal rate would be 5.1% in December. In response to Powell’s comments, the market pricing has now risen to a range of 5.5-5.75%.
As a result, equities are heading in the opposite direction as the yield curve is hitting new cycle lows.
We think a break through the 3900 inflection, the index’s split since May 2022, might result in further selling pressure. For momentum-based tactics, it currently lines up with a number of trend-following trigger levels. The 3760–3764 region is our initial objective for a breakdown, according to technical strategists at JPMorgan.
The strategists expect the S&P 500 to retest this cycle’s lows in the first half of this year.
“We think the probability for a deeper S&P 500 Index slide to next support near 3200 and a bottom later within the first half of 2023 has increased,” they added.
What other analysts have to say about Powell’s speech
Here is what other Wall Street strategists say about Powell’s speech yesterday.
Goldman Sachs: “We expect the data ahead of the March meeting to be mixed but firm on net, and we, therefore, view our standing projection of a 25bp raise in March as a tight call, with some risk that the FOMC could hike by 50bp instead. We anticipate that the median dot will increase by 50 bps at the FOMC meeting in March, regardless of whether the hike is 25 bps or 50 bps, resulting in a peak rate of 5.5–5.75% in 2023. We have also increased our own peak rate projection by 25 bps to 5.5-5.75%.
Morgan Stanley: “If the incoming data flow warrants it, Chair Powell’s prepared statements for his semi-annual testimony opened the door to a return of 50bp hikes at the March meeting. Upside surprises to Friday’s payroll report could drive a faster and longer tightening cycle.”
Bank of America: “For now, we believe that the Fed will raise rates by 25 bps in March. We have argued that the bar is likely high for a return to a faster pace of rate hikes. In our opinion, risk management considerations favour continuing to raise rates more slowly, and monetary policy does indeed operate with “long and varied lags.” But, a return to 50bp hikes will depend on the statistics.
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