Following an auspicious first month of the new year, investors now look toward the Federal Reserve to see if the rally will sustain. With the pace of inflation slowing, many hope the central bank will cool its tightening ambitions. Still, the anxieties associated with its guidance underscore the question on everyone’s mind: What is the stock market doing today?
Sticking to the protocol established during the Great Recession, the Fed responded with a decidedly dovish tactic to keep the economy afloat amid the coronavirus pandemic. However, in 2022, the central bank’s sharp pivot to a hawkish monetary policy to reverse the massive expansion of liquidity disincentivized growth. Nevertheless, recently, the Personal Consumption Expenditures (PCE) index — the Fed’s preferred measure of inflation — revealed a deceleration of rising costs.
In theory, this framework should help convince the Fed to ease up on its previously aggressive tightening. Other data points support this thesis. For instance, yesterday’s Employment Cost Index rose less than economists had expected. As a result, the New York Times pointed out, the benchmark S&P 500 jumped 1.5%.
The policy decision will arrive shortly, at 2:00 p.m. Eastern to be exact. Per CNBC, the consensus among market participants stands at a 25-basis-point bump. Further, commentary from Fed Chair Jerome Powell will follow the central bank’s announcement.
What Is the Stock Market Doing Today?
Although the atmosphere on the Street may be tense, not all experts believe the Fed will symbolize a harbinger of the current market momentum. Many point to the yield on the two-year Treasury, which tends to track expectations for Fed action, according to Reuters. Notably, this indicator has been edging lower in 2023.
“The two year is, in essence, the barometer for where the Treasury market thinks the Fed is headed,” said Quincy Krosby, chief global strategist for LPL Financial.
Nevertheless, the holistic answer to the question, “What is the stock market doing today?” doesn’t provide a clear-cut directive. As CNBC mentioned, “traders may be getting ahead of themselves looking for signs that a pause in hikes or even a pivot is coming soon.”
The central bank’s guidance “will push back against the pivot narrative and thereby current bond market pricing,” wrote DoubleLine’s Jeffrey Gundlach in a tweet. “Should be interesting.”
Whatever the Fed decides, Wells Fargo’s Michael Schumacher notes that investors should watch the 10-year Treasury yield, which has been anchored at the 3.49% level ahead of the Fed’s critical announcement. “Whatever the statement move is, you go the other way for the press conference,” said Schumacher.
Indeed, CNBC points out that the 10-year yield can swing higher if Powell’s comments strike a hawkish tone.
Why It Matters
Unfortunately, a comprehensive discussion of the inquiry of “What is the stock market doing today?” involves myriad moving parts. If the Fed simply needed to tackle inflation, its policy decision likely wouldn’t arouse strong emotions. However, as rising layoffs confirm, such high-level actions don’t occur in a vacuum.
Moreover, investors need to pay close attention to the yield curve inversion. Essentially, when market participants accrue greater rewards on shorter-term securities as opposed to longer term, this circumstance clashes with economic rationality. Strikingly, the Federal Reserve Bank of Chicago warned that the yield-curve slope turns negative before each economic recession since the 1970s.
While the above dynamics of layoffs and recessions imply deflationary pressures, inflation might still rear its ugly head. In particular, China’s reopening could lead to record-breaking demand for oil, according to the International Energy Agency.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
