The frothy market action the bulls enjoyed last week has cooled. Market players are growing nervous about big earnings news and the Federal Open Market Committee (FOMC) interest rate decision that will hit on Wednesday. The Goldilocks economic scenario that has been driving the market for most of January may not be as simple or as easy as expected.
The bullish narrative is inflation is slowing, which will force the Fed to be less hawkish, and a less-hawkish Fed will help the economy avoid a hard landing. It sounds logical, but the Fed’s record of success with managing the economy is abysmal.
There is little question the Fed will hike rates by 25 basis points on Wednesday afternoon, but the main issue is what happens next. There is still a good chance of a 25-basis-point hike at the next meeting in March, but the degree to which that will influence the market action is unknown.
Here on Tuesday morning the Employment Cost Index will hit at 8.30 am ET. This is very important data for the Fed, and while it won’t change Wednesday’s hike it could impact what Fed Chairman Jerome Powell says at his news conference.
We also will have a slew of earnings reports hitting, which will impact economic growth forecasts and will influence the level of the Fed’s hawkishness.
The market became overbought and rather frothy last week, but it corrected on Monday and is continuing to correct on Tuesday morning. Pundits and strategists continue to warn that the market is wrong to believe the Fed is going to back off and provide a tailwind for the bulls, but a big part of the reason this bear market has dragged out is that market players are still fighting the Fed and hope for a dovish pivot to occur right away.
It is going to be another day of positioning as we await the Fed decision on Wednesday. There are a substantial number of earnings reports rolling in, but the most important names will not hit until later this week.