The coming week promises to be a turbulent one for stocks as investors grapple with a barrage of economic data and potentially hawkish messages from the Federal Reserve. The delicate balance between hopes for rate cuts and the reality of a still-strong economy will be tested, setting the stage for market volatility.
Central to the week’s events is Fed Chair Jerome Powell’s scheduled appearance at Stanford on Wednesday. Analysts anticipate he will reiterate the Fed’s commitment to combating inflation, potentially dampening expectations for rapid interest rate reductions. This outlook is likely to be reinforced by key economic data like the ISM manufacturing report (Monday), JOLTS report (Tuesday), ADP and ISM services data (Wednesday), and the all-important jobs report on Friday.
One of our analysts notes that robust economic figures, combined with a persistently hawkish Fed, could further erode expectations for significant rate cuts in 2024. Currently, markets anticipate the first full rate cut in July. Some experts contend a calendar packed with FOMC meetings makes the possibility of more than three rate cuts highly unlikely. A September cut ahead of elections seems especially improbable unless unforeseen economic turmoil arises.
Liquidity Shift Underway
Meanwhile, subtle shifts in the financial system are catching the attention of market strategists. The recent decline in the Fed’s Bank Term Funding Program (BTFP) signals a draining of liquidity from the market. One analyst observes there’s a historical correlation between the start of the BTFP drain and a downturn in the tech-heavy NASDAQ 100 index. If the pattern holds, the NASDAQ 100 could face downward pressure in the coming week.
This view aligns with broader trends in reserve balances. Our analysts believe we have likely seen peak reserves, and the combined effect of the BTFP drain and Quantitative Tightening (QT) could create an environment where the Fed feels compelled to adjust its QT policy. They likely won’t tolerate reserves falling significantly below $3 trillion, a threshold which could be reached within months under the current pace of QT.
Technical Patterns Under Scrutiny
The potential for a changing liquidity landscape has implications for technical patterns as well. Analysts are closely watching an ascending broadening wedge pattern in the NASDAQ, which suggests a shift in momentum. If the observed liquidity drain continues, it could lead to a test of the lower bound of that pattern, potentially near the 17,850 level, in the not-too-distant future.
As always, markets remain dynamic, and unforeseen factors can disrupt even well-reasoned predictions. Nevertheless, this week presents investors with a unique confluence of events: robust economic data, Fed commentary, and subtle yet significant shifts in the underlying flow of liquidity. The interplay between these forces stands to define the short-term trajectory of the stock market.
