Pirmadienis, 26 vasario, 2024
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How the FED FOMC Ruined the Markets on January 31, 2024

The FED FOMC delivered no surprises on January 31, 2024, as it kept the basic interest rates unchanged. This was in line with the market expectations, which had a 95.99% probability of no rate hike. However, the situation in the US economy is still far from ideal, and the FED FOMC did not offer much reassurance to the investors. Let’s take a closer look at what happened and how the markets reacted.

FED FOMC Decision

The primary source of information is the FED FOMC statement after the two-day meeting. The statement revealed some interesting contradictions. On the one hand, the FED FOMC acknowledged that the economy is “expanding at a solid pace”, but on the other hand, it admitted that “the economic outlook is uncertain”. Moreover, inflation remains too high to warrant any changes in the interest rate range.

This confirms our previous analysis. The FED FOMC is not willing to go against the market sentiment, and the statement did not aim to soothe the markets. Instead, the FED FOMC is preparing to lower the interest rates and is already reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

The full text of the message is here.

The statement was followed by a press conference by Jerome Powell, the FED president. He elaborated on the main points of the statement, but he did not make any attempt to calm the markets either. In essence, he said that things could be worse.

Market Reactions

The markets did not react well to the FED FOMC announcement. In the first half-hour after the announcement, the Dow Jones index fell by -0.18%. During the press conference, it dropped by another -0.43%. By the end of the trading session, the index had declined by -0.82%, despite reaching all-time highs earlier. The disappointing results of the technology companies also contributed to the decline.

Dow Jones index
Dow Jones

The price of U.S. Treasury 10 years bonds increased by 0.67% with a significant increase in trading volume. This was a peculiar reaction, considering that the FED president clearly stated that the FED supports a large supply of Treasury bonds. The following graph illustrates this:

U.S. Treasury Securities: All: Wednesday Level
U.S. Treasury Securities: All: Wednesday Level

The price of gold futures also rose slightly while J. Powell was addressing the markets, but there was no major change. On the contrary, the formation of the second consecutive Doji candlestick indicated that the market participants were confused and lacked direction.

Gold futures price
Gold futures price

Insights

We would like to draw your attention to the fact that there is a divergence in the market between the price movements and the AO oscillator. The S&P 500 index chart shows that the divergence has been present since mid-December. And now we are seeing a double divergence. This is a possible sign of a correction. Of course, it is still possible to see a triple divergence, but according to the FED president, the situation is changing rapidly. Therefore, it is advisable to start viewing the market from a bearish perspective.

S&P 500 and AO divergence
S&P 500 and AO divergence

Conclusions

The FED FOMC news did not provide any significant reason to initiate a market correction. However, this day could act as a catalyst and trigger a deeper market decline. Since the local lows in October, the S&P 500 index has risen by 17.70% – more than the average annual index growth. The numbers themselves suggest that a correction might be due…

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