Michael Lebowitz | Sep 23, 2021 06:59AM ET
Stocks rally nearly 1% higher yesterday despite a surprisingly hawkish tone from Fed Chair Jerome Powell teasing taper. Next on the horizon for the bulls is the 50-day moving average at 4435. With taper looming on the horizon will the moving average act as resistance?
If overnight trading is any indication we may answer that question this morning. The NASDAQ is leading the way, up .75% this morning with the S&P and Dow closely behind. S&P 500 Futures are less than ten points below the key moving average. The dollar is weaker this morning as the currency markets appear to be taking Powell’s word that the Fed remains on course to start tapering in November and finish in mid-2022.
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h2 Buy Stocks As The Fed Put Is Alive And Well/h2The Federal Reserve did exactly as expected yesterday and threaded the needle well on putting “taper on the table” and assuring markets the “punch bowl” wasn’t being taken away just yet.
Get The News You WantRead market moving news with a personalized feed of stocks you care about.Get The App“There has been a great deal of handwringing by some market participants over the potential market implications of the Fed’s eventual tapering of asset purchases, and a great deal of ink spilled on the topic too. But at the risk of merely contributing to the latter, we hope to assuage those who worry about the former.
In sum, we think that the tapering of Fed asset purchases (likely a $10 billion reduction in U.S. Treasury purchases and a $5 billion reduction in agency mortgages per month) is likely to have minimal market impact at this stage. This is partly because the Fed has done a decent job of telegraphing when tapering is likely to begin (most market participants believe the announcement will come this year), but more importantly it’s because the asset purchase reductions are likely to be trivial when seen in the context of how large the fixed income markets are today, and how overwhelming the demand for income has become.” – Rick Rieder, BlackRock’s CIO of Global Fixed Income
With stocks deeply oversold on a short-term basis, as noted yesterday, and the threat of “taper” largely baked into the recent decline, there is a decent entry point for traders to add exposure near term. As noted, the 50-dma is the only real challenge ahead but will likely be resolved today.
h2 Powell Q&A Session: A More Hawkish Picture/h2Following a vague reference to taper in the FOMC statement, Jerome Powell made some hawkish comments during his press conference:
Changes to the FOMC statement are highlighted below. Of note, the Fed signaled taper could be around the corner, but did not drop any hints in the statement with respect to timing. “Since then, the economy has made progress towards these goals, and if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” However, in the FOMC press conference Q&A session, Powell noted that taper could come “as soon as the next meeting.”
The Fed reduced their projection for 2021 real GDP growth to 5.9% from 7%. Further, the Fed raised their core PCE inflation forecast for 2021 to 3.7% from 3.0%. The “dot plot” graph below shows the level of Fed Funds that each Fed member expects by year. There are now 9 FOMC members who think the Fed will hike rates as soon as next year, compared to only 7 in June. This represents an even split between members that see liftoff in 2022 and those who don’t, and could have implications for the pace of taper once initiated.
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