The market has started the week on a negative note after a strong October. The near-term direction of the market largely hinges on what the Fed’s monetary policy-setting arm — the Federal Open Market Committee — does on Wednesday.
What Happened: The S&P 500 Index could rally at least 10% on Wednesday if the Fed raises rates by a less-than-expected 50 basis points and Fed Chair Jerome Powell tones down his hawkish rhetoric, JPMorgan analysts say, according to Bloomberg.
See Also: Goldman Sachs Raises Peak Fed Rate Estimate To 5% With Hikes Extending Beyond February: Report
A 50-basis point hike and Powell signaling at the post-meeting press conference that the central bank is willing to tolerate “elevated inflation” and a “tightening labor market" is the least likely outcome, JPMorgan trading desk analysts reportedly said in a note to clients Monday.
But it would be the most bullish outcome for equity investors, added the analysts.
That said, JPMorgan’s economists expect the Fed to hand out a fourth consecutive 75-basis-point hike, the report noted.
Other outcomes are less likely, the firm’s trading desk analysts opined.
JPMorgan Draws Up 6 Possibilities:
- A 50-basis point hike and a dovish press conference: 10-12% rally
- A 50-basis point hike and a hawkish press conference: 4-5% rally
- A 75-basis point hike and a dovish press conference: 2.5-3% rally
- A 75-basis-point hike and a hawkish press conference: down 1% to up 0.5%
- A 100-basis point hike and a dovish press conference: 4-5% drop
- A 100-basis point hike and a hawkish press conference: 6-8% drop, retesting year-to-date lows.
Benzinga’s Take: With inflation still ruling high, the Fed may not be yet ready to drop its guard. September consumer price inflation rose 8.2% year-over-year, faster than the 8.1% increase expected by economists. The annual rate of core price consumption expenditure index — the Fed’s preferred inflation gauge — did rise a little less-than-expected 5.1% in September but it may not sway the Fed’s focused inflation-fighting stance.
The strong job market despite the monetary policy tightening could encourage the Fed to risk another 75-basis point increase in November. Analysts and economists have slammed the Fed for acting based on lagging indicators and risking a sharp downturn in growth.
The most the Fed could do at the November meeting is to temper its hawkish tone.
Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY) settled Monday's session down 0.72% at $386.21, according to Benzinga Pro data.
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