Are you sick and tired of market pundits and mainstream financial media telling you the Fed is done raising then to flip saying rate cut interests have waned? Well be prepared for more. And this just means more uncertainty.

The market narrative has been about the Federal Reserve, interest rates, and a successful soft landing. To end off the year, markets were ripping higher on the fact that they deemed that the current interest rate hike cycle is over and the Fed will cut rates in 2024. I mean the Fed even showed this with their recent dot plot BUT did say that these dot plots can change.

Well now stocks are seeing a slide to begin the year as bond yields are rising as the optimism for fast interest rate cuts is waning. Sure there could be other things such as the events in the Middle East, but as I just mentioned earlier, the current narrative is interest rate and Fed focused.

FOMC minutes just released will give us a better understanding of how Fed officials are thinking when it comes to easing up on tightening. And guess what? FOMC minutes were released as I was writing this article. The headline:

Fed officials in December saw rate cuts likely, but path highly uncertain, minutes show

“In discussing the policy outlook, participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves,” the minutes stated.

However, the minutes noted an “unusually elevated degree of uncertainty” about the policy path. Several members said it might be necessary to keep the funds rate at an elevated level if inflation doesn’t cooperate, and others noted the potential for additional hikes depending on how conditions evolve.

The flip flop continues.

We know one uncertain Fed member is Fed Barkin, who said today that a soft landing is likely ahead but noted that rate hikes are still a possibility.

Still more uncertainty for the future path of policy and this is something the markets will not like.

 

The charts that are garnering a lot of attention are those of bond yields:

The charts of the 2 year, 10 year and 30 year bond yields do show that yields are falling. They are making lower highs and lower lows. Recently, we did see bond yields spike which spooked markets. BUT the current lower high on all these charts still hold. Meaning that the downtrend is still intact and the yield pops were just correction moves. If we close above the recent lower highs, then I would be a bit worried for a larger stock market drop.

Another chart to watch is oil.

Oil prices are up 3% as tensions mount in the Middle East. The Houthi militants based in Yemen, and the recent incident in Iran are worth watching. OPEC and its allies have said that they remain united in “efforts to maintain oil market stability going forward.” Several members of the group pledged in November to cut 2.2 million barrels per day through the first quarter of this year to support prices.

If oil prices were to rise in a strong manner, it would worry traders and market participants because it would mean inflation data could turn upwards…which would mean the Fed would either keep rates higher for longer, or, perhaps remain pragmatic when it comes to tightening given the recent data and spike in oil prices. Just something to consider.

And now to those stock market charts.

The S&P 500 saw a sell off at resistance around 4800. This isn’t any kind of resistance. This is resistance that was once previous record highs for the S&P 500. A close above this level would be a breakout and new all time record highs.

Yes, there has been a few days of sell off, but the current higher low at 4700 is holding. If a daily close below this level is confirmed, then I would expect a further drop in the S&P 500.

The Nasdaq is interesting. We did print new all time record highs, but then reversed the gains and closed back below the breakout zone. Some would attribute this to lower volume during the holiday period of trading. But a false breakout is a false breakout. The current higher low has broken as well. This does look bearish. Perhaps Fed minutes can turn things around.

Meanwhile the Dow Jones is just chilling. It remains quite strong perhaps indicating the move into dividend paying value stocks. I also want to add that foreign money coming into the US stock market would likely be picking up these dividend paying stocks. Perhaps the current action in the Dow Jones shows the current uncertainty. The Dow remains well above the 37,200 zone which is its current higher low.