Rangebound or breakout?
PCE report this Friday, vol still going down
Quick summary:
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Last week, the Fed kept rates unchanged and maintained its 2025 economic outlook, while lowering GDP growth to 1.7% and raising core inflation expectations to 2.8%.
Markets saw mild relief as volatility dropped, but SPX remained range-bound between 5,600 and 5,700.
This week’s focus is on Friday’s PCE inflation data on Friday, along with consumer sentiment and housing market reports.
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Last week’s performance
Fed delivered a predictable update: no shifts in interest rates and steady projections for 2025, holding at two anticipated rate cuts and a stable long-term rate of 3%. Notably, GDP growth expectations for 2025 were lowered from 2.1% to 1.7%, and inflation forecasts were nudged up, with core inflation expected to hit 2.8%. In a bullish turn, the Fed announced a slowdown in quantitative tightening, easing the monthly redemption cap on Treasury securities significantly starting in April.
Market response? A dip in volatility. The VIX fell below 20, sparking a mild relief rally, though the S&P 500 struggled, repeatedly testing but not surpassing the 5,700 level. It hovered mostly between 5,600 and 5,700, suggesting a tentative market not quite ready to commit to a stronger rally.
Looking forward, the stage is set for a cautious buildup to the earnings season. The current market dynamics hint at a potential setup for another downturn, mirroring patterns seen in previous years. As we edge into this critical period, keeping an eye on upcoming earnings in April will be key to understanding the next major market moves.
As for this week, markets will focus on the release of the PCE index due Friday, which will provide updated insights into inflation pressures. This is particularly significant after January's data suggested a cooling trend, despite the Fed's adjustments to its economic projections.
We were trading rangebound last week, between 5,600 and 5,700. Perhaps this week the range shifts to a higher level. Or we get a nice breakout until April earnings. Let’s see.
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