US Inflation Critical for FOMC

With the Fed expected to hike 50 bps, all eyes turn to the "terminal rate". But the CPI inflation a day earlier could throw a wrench in the works.

Data Dependant

Powell said that the Fed would be "data dependent" in its decisions, and the latest figures show inflation has been improving, both on the headline and core rate. This is one of the factors that contributes to the notion that the Fed will hike by 50 bps this time around and not 75 bps. The other one, of course, is that Powell pretty much indicated that in his last appearance before the start of the blackout period.

Those are the main factors for three-quarters of economists expecting a "double hike". The rest? Expect a 75 bps hike. Inflation is still high, and November inflation remains unknown, should it miss expectations. November CPI is forecast to extend the trend downward, with the headline rate projected to drop to 7.3% from 7.7% prior. Core CPI, most important to the Fed, is expected to drop to 6.1% from 6.3%. Well above the target rate, but trending downward might be enough to get the Fed to slow down.

A hike is still coming

If inflation falls more than expected, it's unlikely it will change the outlook for the Fed. The issue is what happens if CPI comes in unexpectedly higher and whether that could lead to a reevaluation by the Fed to go for the "triple" hike a quarter of economists are predicting. Last time, inflation was unexpectedly lower due to the lower cost of shelter, and the housing market has only weakened since then.

All eyes are on the so-called "terminal rate" without any change to the rate hike's expectations. Currently, the market is pricing in a terminal rate of 5.0%, to be reached by May next year. With rates currently at 4.0% and a 50 bps expected on Wednesday, that implies two more "single" hikes in the first five months of next year. After that, there is the question of whether the Fed will stay firm through a deteriorating economic environment or "pivot" to support the economy. Whatever the Fed implies about the terminal rate is likely to be the primary factor affecting the markets since that will show the expected rate trajectory over the coming months.

Nasdaq completed rising wedge

Nasdaq completed a rising wedge that could lead to a full-blown reversal or a pullback and further upward spiral instead. The first swing low of the lower trendline at 10600 (S2) remains a critical determinant, as the higher swing low at 11440 has already been breached. The swing high of 11195 (S1) might offer a bounce, and if momentum increases along with prices it might end up being a corrective leg, leading prices toward the 12900 (R2) resistance after a break past the 12120 (R1). But, losing either of the supports might expose the 10k handle if the floor at 10500 (S3) succumbs to pressure.

Key takeaways

The FOMC members are expected to have decided on a 50 bps hike this week unless the CPI inflation figures released a day earlier could impact the decision. If the core figures show higher-than-expected inflation, the Fed may hike rates by 75 bps. The market is currently pricing in a terminal rate of 5.0%, to be reached by May of next year, and will closely watch the Fed's indication of the terminal rate, as it will show the expected rate trajectory over the coming months.