Dollar Tight Range to Be Tested by GDP and Feds Preferred Inflation Read

S&P 500, US Dollar, Earnings, BOC and FOMC Rate Decision Talking Points:

The markets are doing everything they can to indicate that proximate technical barriers that chart traders would otherwise hold dear will not be dictating the next trend. A clear fundamental bead has been absent these past weeks, and it shows in the lack of traction that we‘ve established in benchmark risk assets, currencies and other principal measures of the financial system. There is no better indication of the indecision for me than the S&P 500. There was a high profile but ultimately unproductive attempt to reverse the 2022 bear trend back in December, which many technicians played down (myself included) due to the market conditions. In thinner markets, technical barriers can be more acute in less volatility; but a swell in activity can also render them permeable. What we have witnessed this past week all but erodes faith in the clearly delineated technical levels and we can’t say it is due to holiday conditions. The SPX has broken above the 200-day moving average (SMA) and trendline stretching back to the beginning of 2022, only to stall out and crash back into range. This week, we made another go at those same levels and subsequent move back into established range. This time though, the ‘path of least resistance’ move (the slide back into range) was pressured back to the ramparts of the technical pattern within a single trading session. Perhaps this acceleration is a sign of speculative build up and anticipation for imminent resolution？

Looking back over the calendar this past session, there simply wasn‘t anything with the fundamental girth necessary to snap the market from its complacent drift. The aftermath of the Microsoft earnings were completely overwhelmed by the general trend of the market itself. The rally following the tech company’s uneven earnings after hours Tuesday did not hold into the open. MSFT shares gapped lower just as the S&P 500 and Dow would. And, like those indices, it would also recover much of its losses. Another honorable mention for fundamental awareness was the Bank of Canada rate decision. The event itself was remarkable, not in the group‘s decision to lift its benchmark rate 25bps to 4.50 percent. That was the consensus forecast. Rather, the surprise was in the clarity with which the policy officials signaled their decision to shift from a tightening regime to one that was essentially a plateau. For the Canadian Dollar itself, this is a dose of reality; but it wasn’t really a surprise. Looking to swaps-derived rate forecasts for the BOC, the rate for mid-year was approximately 4.50 percent (and there are still cuts priced into the second half). The greater speculative impact here is that the BOCs actions will likely be interpreted as a landing pad for other major central banks…like the FOMC.

Setting aside the aimless volatility of the S&P 500 and the pockets of isolated volatility around concentrated event risk, there has been a remarkable consistency to the indecision of the US Dollar. Mirrored in the majors like EURUSD and USDJPY, the DXY Dollar Index has shown an incredible reservation in price action over the past 9 trading days. In fact, the historical range carved out over that period (1.3 percent of spot) represents activity comparable to the holiday trading conditions through the end of December. Liquidity is back to normal levels, so this is indecision likely born of a uncertainty around principal fundamental movers. Could the upcoming US 4Q GDP release definitively push us below the midpoint of the 2021-2022 range or perhaps truly reverse the slide from these past four months？ I have my doubts.

Looking to the Global Macro docket for the final 48 hours of the trading week, there is a range of meaningful event risk, but there are two particular readings that stand as particularly capable of generating systemic response beyond the local markets and currency: the US 4Q GDP release (Thursday 13:30 GMT) and US PCE deflator (Friday 13:30 GMT). The former will naturally update us on the health of the world‘s largest economy. That could carry significant weight when evaluating the health of the global economy. The economist consensus is for a slowdown to a 2.6 percent annualized pace, but that is hardly shocking for bulls or bears. If there is a significant drop, mind the ’recession‘ fears that could arise – which would more likely hurt equities and charge the safe haven aspect of the Dollar. Alternatively, the economic enthusiasm of a strong reading is likely to be more than offset by the implications for the Federal Reserve to fulfill its commitment for a targeted terminal rate of 5.1 percent (a premium to the market’s view). If we move through Thursday without resolution, the Friday inflation indicator is the Fed‘s favorite. A surprise here would be more distinctly interpreted in the Fed’s potential spectrum.

Where the US GDP and PCE deflator are high profile events in the macro fundamental sense, their history for generating market movement is not particularly strong. The GDP reading is a lagging indicator and the market seems to prefer the earlier released CPI reading. That said, there is still the potential for volatility as much due to the very narrow trading ranges of the Dollar and indices; but follow through has even more trouble than the weekend liquidity drain. Next week, we are overloaded for exceptional event risk. For the US perspective alone, we have the Conference Board consumer confidence report, ISM manufacturing indicator, FOMC rate decision and Friday NFPs. Few will want to make a decision on an upstream and second order indicator when the definitive market movers are dead ahead.