The key event scheduled for this week is the Federal Reserve’s two-day meeting, commencing on Tuesday and concluding on Wednesday with an announcement on the interest rate decision. Markets anticipate a rate hike, which would bring the interest rates to their highest level in 22 years, as part of a series of historic rate increases aimed at curbing surging inflation. Futures traders expect a 25-basis point increase, and this decision has already been widely anticipated, shifting the focus to Federal Reserve Chair Jerome Powell’s remarks during the subsequent press conference on Wednesday afternoon.

Presently, the market expects this to be the final rate hike from the Federal Reserve, given the aggressive tightening measures taken to combat the soaring inflation. However, there is a possibility that the Fed might hint at the potential for another rate increase later in the year—making it the 12th rate hike since the series began last spring, even though inflation has shown signs of cooling in recent months.

The CME FedWatch Tool, which gauges market sentiment, does not indicate expectations of further rate hikes in the coming months. Nevertheless, it is anticipated that the Federal Reserve will adopt a more cautious tone and emphasize the need for sustained progress in economic data before declaring inflation to be under control. Chairman Powell’s statements may shed light on the Federal Reserve’s stance for the second half of the year, including the likelihood of an early conclusion to rate hikes.

In addition to the Federal Reserve’s meeting, economic data scheduled for later this week will provide further insight into this trend. The Gross Domestic Product (GDP) for the second quarter is expected to be released on Thursday, while the latest reading of the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, is due on Friday.

The markets have started the week on a positive foot, but investor’s focus is on earnings reports from 165 S&P 500 companies, including several mega-cap tech stocks known as the « Magnificent Seven » that have been major drivers of market growth in recent months.

Source: TradingView

Recent optimism regarding the economy and the potential for easing inflation is notable, with confidence levels reaching heights not seen since 2021. Economists are observing improved business conditions, and investors are growing more optimistic about the Federal Reserve’s ability to achieve a soft-landing scenario, where inflation is brought under control without adversely impacting the economy.

This newfound confidence is underpinned by the slowdown in inflation and the economy’s resilience, despite the Federal Reserve implementing ten consecutive rate hikes since March 2022. Consequently, concerns about an imminent recession have been somewhat alleviated, with some Wall Street analysts now projecting a milder recession that may occur later than initially expected.

The recent data shows a slowdown in inflationary pressures, with the Consumer Price Index (CPI) rising by 3% in June, a significantly slower pace compared to the four-decade high of 9.1% in June 2022. Furthermore, the Federal Reserve’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) price index, rose by 3.8% in May compared to the previous year, down from the 4.3% annual rise recorded in April. The June reading of the PCE index, eagerly awaited by the market, is scheduled to be released on Friday by the Commerce Department.

From a technical analysis perspective, the price action remains constructive and despite the overbought Relative Strength Index indicator readings we do not expect anything more than a short-term pull back at this juncture in time. The momentum conditions are strong and bode well for further advance in the coming months.

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