Market Update: FOMC to sink or boost the SPX500

December 15, 2021
by Joseph Jeffriess, Market Analyst

Hi traders, focus moves to the upcoming FOMC as traders will be looking to the message from the Fed regarding how they view inflation and its move away from away current policy setting up its first-rate rise possibly next year. How will this sit for stocks, will the current reaction gather pace?

The markets are expecting a faster move away from its easy policy clearing the way for potential rate rises. Officials are expected to release an updated forecast showing two to three interest rate hikes in 2022 and another three to four in 2023. Previously, there had been no consensus for a rate hike in 2022, but half of the officials expected at least one. Inflation, the central bank is also expected to advise that inflation is no longer a “transitory” or a temporary problem as first thought and that rising prices could be a bigger threat to the economy. The consumer price index rose 6.8% in November and the wholesale prices gained 9.6% over the previous 12 months.

Finally, the balance sheet could be a wild card. Currently, it sits at 8.7 trillion. What the Fed says about the balance sheet and whether it hints when it might start to shrink could also have an impact on the markets.

Diane Swonk, the chief economist at Grant Thornton, expects the Fed to discuss the balance sheet at this meeting but not take action.

“I think he will be questioned about the balance sheet,” said Swonk. “They did try to let their balance sheet drain previously. That is something we should expect to happen as well more rapidly this time. I don’t think they made that decision yet…I wouldn’t be surprised to see it in the [meeting] minutes.”

Looking at the SPX500 we can see key resistance continues to hold price away from records. The last two sessions have been declines but the price continues to remain above its main uptrend. A negative reaction could see the current move lower track back to the main trend line any break of that point could start to show a shift in momentum. A hold by buyers that remains below resistance could set up and new longer-term consolidation. We can see the beginnings of an ascending triangle starting to form. A pulse higher that breaks resistance sets up a new breakout and we would want to see strong momentum to show that buyers have the numbers to carry the move forward.

SPX500 D1 Chart

Sources CNBC

All times are AEDT.