This year has been an absolute ripper for the US100.
Last week saw yet another record close, posting new highs above 16,500.
Let’s look at the chart:
We can see a firm uptrend is in place, with the 100 Day Moving Average providing support on deeper pullbacks.
Are things getting too exuberant though?
The tech index is now trading outside of the Upper Keltner Channel (2x Average True Range above 20 Day MA).
Analysts are starting to note the widening gap between tech/growth stocks vs the so-called ‘value’ stocks, and the Federal Reserve is back in focus this week too with the (new?) Fed Chair set to be announced and Core PCE inflation data (the Fed’s preferred inflation measure) to be released too .
The Federal Reserve and the USD are at the heart of the global economy so Fed rate hikes will always cause ripples in financial markets…
Although it’s not the actual rate hikes, more the speculation over when hikes are coming that creates the turbulence.
Setting the scene
Since the onset of the pandemic the Fed has been engaged in a massive QE program.
- $80bn Per Month Treasury Securities
- $40bn Per Month Mortgage Backed Securities
- $120bn Per Month Total
On November 3rd, the FOMC announced the start of the tapering process. Effective immediately, they will begin slowing the pace of purchases by $15bn per month:
- November $70bn & $35bn = $105bn Total
- December $60bn & $30bn = $90bn Total
Following this sequence the taper would be completed by the middle of 2022 with the asset purchase program ending in June when the focus would switch to rate hikes.
Something like this:
However, comments from a couple of officials this week suggest that the exit could come sooner.
Governor Waller:
“For my part the rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022,”
“I believe that policy may need to pivot to a faster taper based on incoming data that I will be monitoring”
“You could have a rate hike as early as the second quarter ”
“Monetary policy will still be providing an extraordinary extent of support for the economy.”
Vice Chair Clarida:
“The economy is in a very strong position” & “there is upside risk to inflation”
“It may well be appropriate at that meeting to have a discussion about increasing the pace at which we are reducing ” [asset purchases].
“I’ll be looking closely at the data that we get between now and the December meeting”
Those are some pretty strong hints from two of the Board Governors (Voters) that the taper may speed up through the first quarter of next year.
Why does this matter?
Well, it doesn’t, but it does. There’s a lot of moving parts.
In real terms, rates aren’t actually going to get tight for quite some time.
In market terms, the direction of travel is often as important as the destination.
In simple terms, market participants could see that the writing is on the wall and the ‘punchbowl’ of easy money is going to be taken away sooner than they anticipated.
Is it merely about ‘risk management’ as Chair Powell said at the November 3rd press conference?
Or are the Fed feeling they’ll need to act sooner on inflation?
The Core PCE reading on Wednesday will be closely monitored for signs that inflationary pressures are broadening to force the Fed into action.
If this measure comes in hot, traders could pre-empt a Fed response, putting downward pressure on the rate-sensitive US100.
Not investment advice. Past performance does not guarantee or predict future performance.
