The Fed and The BOJ Will Take Center Stage The Week of March 18, 2024

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3/17/24

#Stocks –

#Macro – $SPX, $NDX, #FED, #BOJ, #RATES

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The biggest event of the week may not be the Fed meeting but the BOJ, which is set to conclude on Tuesday. There have been rumors that the BOJ plans to raise rates for the first time in over a decade. Whether the move is priced in or not is unclear because we have seen these rumors before, and nothing has happened. So, it seems possible that the market is somewhat skeptical about another supposed BOJ rate hike.

Yen

We have seen the yen strengthen some against the dollar recently, but much of those gains have also been returned. The yen has returned to its 61.8% retracement level at around 149.20 to the dollar, so it seems more likely than not that the yen will strengthen further against the dollar in the coming days once the initial retracement is over.

Nikkei

The Nikkei has recently fallen victim to the rate hike talks and stronger yen. The index gapped below a critical uptrend on March 10 while falling out of a rising channel on March 12 and now appears to have formed a pennant.  A stronger yen and higher rates won’t be good for the Nikkei going forward, and the technical chart seems to confirm that the Nikkei could be heading lower over the near term.

S&P 500 Vs. Nikkei

When comparing the Nikkei to the S&P 500, priced in Japanese yen, one can see that they match up perfectly. So, if we were to conclude that some of the benefits we have seen in the US markets have been driven by easy monetary policy and a weaker yen, then it seems possible that a stronger yen and weaker Nikkei could negatively impact US markets as well, and this one would need to be closely monitored.

S&P 500

Indeed, the more robust inflation data this past week did not help the US equities market either, as rates rose, the dollar strengthened, and spreads widened, pushing the VIX higher and stocks lower. An uptrend was broken this past week, but the S&P 500 did find support around 5,100, which does create an opportunity for the S&P 500 to test the 5,050 level. But until 5,050 can be breached, there is not much else to say.

NASDAQ 100

The NASDAQ 100 appears to be in worse technical shape than the S&P 500 thus far. The NASDAQ falling below support at 17,850 does open a potential gap fill to 17,450, which would erase that Nvidia post-earning gap rally witnessed in mid-February. Completing the gap fill at 17,450 would likely mean that the NASDAQ 100 also falls out of the rising megaphone pattern.

10-Year

Meanwhile, this past week, we saw the 10-year rate rise back above the 4.3% level, and that has been a level to watch for because resistance around 4.35% has been strong, with rates failing multiple times to get beyond that resistance. A push beyond 4.35% likely opens up a pathway for the 10-year rate to push higher to 4.5% and possibly back to 4.75%. Much of this will depend on what the Fed says and the dot plot they provide. A Fed that takes rate cuts away suggests the neutral rate may be higher than previously thought; this would be the fuel needed to push the 10-year rate higher from current levels and above 4.35%.

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2-Year

The same can be said about the 2-year rate, which finished last week at 4.73% and is also closing in on breaking out. It is pushing higher towards 4.85% and potentially returning to 5%.

Curve

If the rate cuts aren’t going to be deep, the neutral rate is higher than previously thought. If the BOJ delivers a first-rate hike, then it would make sense for the yield curve to steepen, meaning that the 10-year would rise to the 2-year, similar to what was seen in August and September.

So what comes out of the Fed and the BOJ this week could be consequentially for markets because both events could trigger tight financial conditions globally. Given the inflation reports here in the US last week, it’s tough to say that financial conditions are tight. Given just how much both US and Japanese markets have rallied, it would seem to suggest that financial conditions have gotten too easy, and some policy adjustments are needed.

-Mike

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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