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Dictating Fed’s Action & Positioning For Rally

U.S. Stocks closed higher again on Friday, 13th January 2023, continuing their rally after the CPI report on Thursday came in line with expectations. 

Friday saw the start of earning season with the Major banks, Bank of America, Citigroup, JPMorgan, and Wells Fargo reporting results that were not as bad as was feared. 

The initial reaction was to sell their stock, but their stock prices turned positive late in the day.  

On the economic front, the University of Michigan consumer sentiment index climbed in January to its highest level in nine months, which followed December’s consumer price index data released Thursday showing prices declined slightly.  

Against this, the market is now expecting the Fed to slow down the pace of hikes or even stop altogether. 

For the week, the Nasdaq Composite surged 4.8%, while the S&P 500 jumped 2.6%, and the Dow Jones index added 2%. 

Here are the closing levels on Friday, 13th January 2023:

 Last Change %Change 
Dow Jones 34,302.61. +112.64 +0.33% 
S&P 500 3,999.09 +15.92. +0.40% 
Nasdaq Comp 11,079.16 +78.06 +0.71% 
US 10Y 3.50%   
VIX 18.35 -0.48 -2.55% 

Is this the start of the big rally we talked about last week? 

The market is positioning itself for some kind of rally after 2 weeks of positive results. 

Swap markets are pricing a higher chance of a 25 basis point hike at the next Fed meeting and a small chance of zero the meeting after. 

What this tells us once again is that the market is ignoring the hawkish comments and reading into the data. The data is telling us that inflation is slowing down and that the Fed should slow down or pause even.  

At the same time, the market is also looking forward to the possibility of the Fed may start to cut rates later this year even though there is no evidence from the Fed that they will be doing so. 

So, the market is dictating what the Feds should do and is positioning itself for a rally. 

“Don’t fight the Fed” I always say but, in this case, you can fight the market. It wants to go higher, and the data is feeding the flames to make it so. 

The risk is, we get bad earnings and even worse forward guidance. 

The other risk is that the Fed is still sticking to their plan, insisting that their work is not done and will maintain high interest rate for longer. 

Higher rates for long cannot be good for markets no matter how much we want the markets to go up. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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