Two major US economic announcements this week have the potential to shake markets and shape the Federal Reserve’s thinking on interest rates. The country’s fourth-quarter gross domestic product (GDP) printout is expected on Thursday, January 26, followed on Friday by the December reading of the core personal consumption expenditure (PCE) index, reportedly the Fed’s preferred measure of inflation. is. The two reports come a week before the Federal Open Market Committee meets to discuss interest rates, with an expected rate hike on February 1.
Analysts estimate that US GDP increased by 2.6% in the three months to the end of December, up from 3.2% in the third quarter. Meanwhile, the GDP price index, which measures inflation in the prices of goods and services, is estimated to have risen 3.2% in Q4, up from 4.4% in Q3.
Meanwhile, the overall PCE price index is expected to have grown 5% in the year to December, compared to 5.5% in November. The core PCE price index, which excludes volatile food and energy prices, is expected to be up 4.4% year-on-year, up from 4.7% in November.
Both announcements – Q4 GDP and December PCE – are critical because they will tell the market whether or not the Fed has more work to do to contain inflation. Stock markets, feeling the Fed has already done too much, are trying to outrun the Fed, with the S&P 500, Nasdaq 100 and Dow Jones Industrial Average all well above their October lows. Meanwhile, the bond market expects the Fed to stop tightening and cut rates later this year, based on Fed Funds futures, as shown in the chart below.Source: Michael Kramer
Stronger-than-expected GDP growth and PCE inflation could cast doubt on the idea that the Fed is nearing the end of its tightening cycle and suggest more work needs to be done.
S&P 500 at a turning point
The S&P 500 is at a critical inflection point, as the chart below shows. The index is flirting with a break above its 200-day moving average and the trendline that has been in effect since the January 2022 peak. It is also starting to show signs of a new uptrend that started from the October lows. These two trendlines converge and are likely to determine whether the bear market continues or whether the index moves higher.
However, from a bullish perspective, a rally can be challenging as the long-term trendline from the March 2020 low has provided resistance on several occasions. Meanwhile, a wave count indicates that the index is in a symmetrical triangle. If this pattern continues, the index could move lower.Source: Michael Kramer
Nasdaq 100 in consolidation phase
The Nasdaq 100 also appears to be consolidating. However, it has a big battle ahead, with an uptrend since its March 2020 low and a symmetrical triangle offering resistance. A falling 200-day moving average – the thin blue line on the chart below – is also approaching.
Meanwhile, the Relative Strength Index (RSI), shown in the lower portion of the chart, continues to post lower highs, suggesting that the Nasdaq 100 rally may be gaining steam. Even if the RSI were to break the downtrend, it currently stands at 63, close to an overbought level above 70.Source: Michael Kramer
Dow is approaching key resistance level
The Dow is already trading above its 200-day moving average, which will likely act as support. However, there is resistance around the 34,200 area, which has been at the top of the trading range since April.
In addition, the index has been consolidating sideways since November. As a result, there is an argument that can be made that the average has formed a diamond reversal pattern over the past two months. Momentum in the Dow was bearish, as indicated by the lower high on the RSI.Source: Michael Kramer
With the stock market betting that the Fed is nearing the end of its tightening cycle and on track to cut rates later this year, there may be downside risk to equities if Q4 GDP and December PCE point to further rate hikes. However, if the two announcements prove that the US economy is weakening or close to a soft landing, stock markets could move higher.
Charts used with permission from Bloomberg Finance LP. This report contains independent commentary which may be used for informational and educational purposes only. Michael Kramer is a member and investment advisor representative at Mott Capital Management. Mr. Kramer is not affiliated with this company and is not on the board of any related company that issued this stock. All opinions and analysis presented by Michael Kramer in this analysis or market report are the sole views of Michael Kramer. Readers should not treat any opinion, position or prediction made by Michael Kramer as a specific invitation or recommendation to buy or sell any particular security or pursue any particular strategy. Michael Kramer’s analyzes are based on information and independent research that it believes to be reliable, but neither Michael Kramer nor Mott Capital Management warrants their completeness or accuracy and should not be relied upon as such. Michael Kramer is under no obligation to update or correct the information presented in its analyses. Mr. Kramer’s statements, guidelines and opinions are subject to change without notice. Past performance is not an indication of future results. Past performance of an index is not an indication or guarantee of future performance. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific result or profit. You should know the real risk of loss when following any strategy or investment commentary presented in this analysis. The strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not take into account your specific investment objectives, financial situation or needs and is not intended as a recommendation that may be appropriate for you. You must make an independent investment or strategy decision in this analysis. Upon request, the advisor will provide a list of all recommendations made in the past 12 months. Before acting on any information contained in this analysis, you should consider whether it is appropriate for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of an investment. Michael Kramer and Mott Capital received compensation for this article.
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