FOMC Minutes Hold the Key to "Peak"

Investors will be pouring through the minutes of the last FOMC meeting to find evidence of dovishness that can support the S&P 500's continued rise.

Peak Rates or Peak Market?

One of the major dilemmas for traders is whether a peak has been reached in the Fed's rates or the stock market since both are unlikely to be confirmed simultaneously. If the Fed has peaked, it can be presumed that year-end rally pressures could support the market through the holidays. After an unusually disappointing September and October, the S&P 500 has already made substantial gains towards retaking the summer highs. But that has been substantially based on hopes that the Fed is done with rate hikes.

Money markets are in an unusual agreement situation, with a 100% chance for rates remaining unchanged at the next meeting and the one after it. It isn't until the end of March that some disagreement appears, with a minority calling for a rate cut, with the market pricing in a more than 50% chance of a cut by May of next year. This projection clashes with the Fed's stance on a potential rate hike and holding rates to the end of the year.

What the Minutes Might Say

Traders will be looking for some contradicting evidence compared to the results of the last FOMC hold, with Fed Chair Powell suggesting that policy would remain tight for a long time. The consensus was that Powell was surprisingly dovish, which helped support the recent market rally. Markets will seek confirmation in writing from other FOMC members that they believe that inflation will keep coming down and that the slowing economic outlook justifies turning more dovish.

Other investors worry that the Fed will remove some of the perceived dovishness. After all, the monetary policy statement was largely unchanged from before and simply added some caution about the economic outlook. That means the minutes could reflect a strong bias in favour of keeping rates higher, instead of the markets which have moved to price in as much as 100bps of cuts by the end of the year. Given the latest economic data and the Fed's own GDPNow forecasting a sharp deceleration of the economy in the fourth quarter, markets could discount mention of hiking and focus more on how willing the Fed would be to ease to try to achieve a soft landing.

The S&P 500 has little room for upside, given that the 4540 peak is near current levels but an abundance of downside. Still, while trading above 4400, the index could soar to fresh 2023 highs once 4600 is out of the way. The question is whether or not the downside leg from the peak is a wedge. If it is, we will unlikely see much more upside as the pullback would likely be done at such depth. If not, up we go.

Source: SpreadEx / SPX 500

Key Takeaways

Investors await the FOMC minutes to confirm a dovish stance from the Fed, which could support the S&P 500's ongoing upward trend as they grapple with whether the Fed's rates or the stock market has peaked. If the Fed has peaked, it may fuel a year-end rally in the market. Money markets agree that rates will remain unchanged at upcoming meetings, with some projecting a rate cut by next year. Traders hope to find contradicting evidence in the minutes compared to Fed Chair Powell's recent statements, which were perceived as dovish. However, some worry that the Fed may retract its dovishness, as the monetary policy statement remained largely unchanged.