One Fed Member Thinks More Rate Hikes Are Coming

S&P is down every day so far in this seasonally weak August.

Last month, the Federal Reserve raised interest rates “to a range of 5.25% to 5.5%, the highest the Fed target rate has been since 2001.”

However, over the weekend Fed Gov. Michelle Bowman — a voting member, mind you — said interest rates would likely need to go higher in order to satisfy the Fed’s inflation goals. She said: 

“The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2% goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level.” 

She added that, “additional rate increases will likely be needed to get inflation on a path down to the 2% target.”

Interesting. 

Admittedly, inflation is still a problem (although it’s trending in the right direction) and notably, the market is not really pricing in a rate hike at this point. For that matter, it’s not pricing in a rate cut either. 

The Federal Funds futures are pricing in about an 85% chance of “no hike” in the September meeting (and about a 15% chance the Fed raises by another 25 basis points). In December, its largest probability is for rates to remain unchanged from today’s levels, (at 61.7%). However, there are some probabilities of rate cuts and hikes, as shown above. 

Finally, will it even matter?

The Fed has been hiking rates throughout the year, but the S&P has been storming higher. At the recent highs, the index (SPX) was down just 4.4% from its all-time high. Even after last week’s correction, it’s down just 7.2%. 

That’s not to say we can’t endure a larger correction, but I’m just pointing out that the “Don’t fight the Fed” rhetoric has been silenced by the “Don’t fight the trend” chants. 

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We’ve had four trading sessions so far in August and the S&P has ended lower in all of them. So we’re starting off a seasonally weak month on a bad foot, which is not too surprising. 

The bulls tried to rally the markets on Friday after Amazon’s strong earnings reaction and the jobs report, but prior support flipped to resistance and with Apple’s bearish earnings reaction offsetting Amazon’s bullish reaction, the bears gained momentum as the S&P fell almost 1.5% from the session high and closed near the day’s (and week’s) low. 

So what now? 

I don’t know that the correction is finished and in fact, I think it could be a multi-week pullback. That being said, bulls are not going to throw out month’s of gains after one disappointing week. 

Technical Edge 

• NYSE Breadth: 66% Upside Volume

• Advance/Decline: 53% Advance

• VIX: ~$17 

SPY

On Friday we said, “On the upside, they want to take out yesterday’s high at $450.79, then ideally run the SPY up to the $451.50 level.” Well, that’s exactly what we got and then the $451.50 level was resistance.

Now trading ~$448 in the pre-market, SPY bulls have their work cut out for them. On the upside, $449 to $449.50 is the first area of resistance. Above $450 and we could see a potential push back to the $451.50 area. 

Not only is that zone significant, it’s also the 78.6% retracement of Friday’s range. 

• Upside Levels: $449 to $449.50, $451.50, $453, $455.50

• Downside Levels: $446.25, $444 to $445

Daily chart below for more context.

At some point, I could see a move back down to the $443 area to fill that open gap, with a potential overshoot down to the 10-week and 50-day moving averages. Maybe not today or tomorrow, but sometime in the first half of August would give bulls a healthy dip to buy and a decent R/R.

SPX

• Upside Levels: 4500, 4526-30, 4540, 4585

• Downside Levels: 4472-75, 4555-60

S&P 500 — ES Futures