The Fed’s cycle could be near completion | 03 February 2023

#SP500:

Traders of futures tied to the Fed's policy rate kept bets on Friday that the U.S. central bank will raise interest rates just once more beyond this week's widely expected quarter-point hike before stopping. The current target range is 4.25% to 4.5%. There will be no updated Summary of Economic Projections accompanying the meeting, leaving traders to sift through the policy statement and Chair Powell’s post-meeting press conference for any potential clues on the path of future policy. The 2-Y US Treasury yields are highly correlated to the path of monetary policy, given their short duration. Since early November, yields have dropped around 50 bps to 4.19% as of January 26. Lower yields have been a product of receding pricing pressures and reduced expectations for Fed tightening. While yields violated an uptrend amid their current pullback, they also dropped below the upper bound of the Fed’s target range. This crossover occurred despite Fed commentary suggesting ‘there is more work to do’ in order to bring down inflation. However, the market appears to be pricing in an end to the rate cycle perhaps sooner than the Fed suggests. This is a positive signal for the stock market!

Trading recommendation: buy 4019 and take profit 4104.

XAUUSD:

Federal Reserve policymakers are finally seeing some sustained progress in sapping high inflation, cementing their plan to raise interest rates by a quarter percentage point next week, with traders betting they'll end their hiking campaign in March. The U.S. central bank's preferred gauge for inflation, the personal consumption expenditures price index, rose 5.0% in December from a year earlier, slower than the 5.5% 12-month gain as of November, the government reported, and the lowest level since September 2021. Core PCE, which the Fed uses to gauge the underlying momentum of inflation as it strips out volatile components, rose 4.4% from a year earlier, the slowest pace since October 2021. In the most recent three-month average, it increased around 3.2% on an annualized basis.

Trading recommendation: buy 1915 and take profit 1949.

#WTI:

An OPEC+ panel is likely to endorse the producer group's current oil output policy when it meets next week, as hopes of higher Chinese demand driving an oil price rally are balanced by worries over inflation and a global economic slowdown. The meeting comes as the price of oil has rallied in 2023 towards $90 a barrel on hopes Chinese demand will recover while the European Union and Group of Seven is set to broaden a price cap on Russian crude to refined products from Feb. 5. OPEC+ is by now somewhat comfortable that the difficult time of COVID's impact is behind us and the geopolitical situation and China's recovery are driving the volatility.

Trading recommendation: buy 77.50 and take profit 82.00.