The FED foresees "mild recession" later this year

Multiple interesting developments took place in the U.S. market yesterday. First, CPI and inflation rate came in better than expected (although the core inflation accelerated by 0.1% year over year), sparking a short-lived bounce in U.S. indices, followed by relative stabilization in the market ahead of the FOMC minutes. Then, once the report came in, the market started to decline amid a sudden change in the tone of the FED officials, which now foresee a “mild recession” later this year.

This comes to us as no surprise since, already last fall, we noted that the FED projections were implicitly pointing to the recession in 2023 and 2024. However, this shift from an implicit tone to an explicit one is a major development that should not be overlooked, especially as the FED continues to indicate higher interest rates from the current levels. While hiking interest rates is very effective at fighting inflation, which will continue to decline toward the end of 2023, it is hardly bullish for the equity market.

Due to that, we maintain a bearish stance on the U.S. market and the price target for SPX at 3 400. We will pay a lot of attention to banking earnings (starting tomorrow with Citigroup, JPMorgan Chase & Co., and Wells Fargo and continuing with other major and regional banks in the following weeks). In general, we do not expect the current earnings season for stocks to be any better than the previous one. To confirm our bearish thesis, we will seek more downgrades in the outlook and decline in corporate profits. Furthermore, we will monitor the labor market, bank deposits, loan delinquencies, consumer spending, and rate of consumer savings (among other important metrics).

Illustration 1.01

The picture above shows the 1-minute chart of SPX. The yellow arrow indicates the time when inflation and CPI data were released.

Illustration 1.02

Illustration 1.02 displays the 1-minute chart of SPX and the subsequent price action following the release of FOMC minutes.

Technical analysis gauge
Daily time frame = Slightly bullish
Weekly time frame = Neutral
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

Illustration 1.03

The illustration above portrays the daily chart of SPX and fan lines acting as resistance and support levels.

Please feel free to express your ideas and thoughts in the comment section.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.

Comment:

Illustration 1.01 and Illustration 1.02 show charts of ES1!, not SPX; it is a typo.

Trade active:

Today's earnings of three major banks showed a mixed trend with some positive and negative indicators. Generally, net interest income and total revenue have increased significantly, but the increase in net charge-offs and provision for credit losses indicates a higher level of credit risk. At the same time, the decrease in assets and deposits is negative. Our stance is that more monitoring of the bank's financial performance is necessary to assess the situation accurately. We will provide more thoughts on this matter on Monday.

Trade active:

The Federal Reserve is set to hike interest rates by 25 basis points tomorrow, taking us a step closer to recession.