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Short Term Elliott Wave view in SP500 (SPX) suggest that rally from 6.17.2022 low is unfolding as a zig zag Elliott Wave structure. Up from 6.17.2022 low, wave 1 ended at 3925.73 and dips in wave 2 ended at 3723.21. Internal of wave 2 unfolded as a zigzag structure in lesser degree. Wave ((a)) ended at 3746.62, wave ((b)) ended at 3918.77 and wave ((c)) lower ended at 3723.21. This completed wave 2 in higher degree.

Up from wave 2, wave ((i)) ended at 3895.99 and dips in wave ((ii)) ended at 3818.14. Index extends higher in wave ((iii)) towards 3973.83, wave ((iv)) ended at 3929.53, and final leg higher wave ((v)) ended at 4002.94 which completed wave 3. Pullback in wave 4 ended at 3909.90 as zig zag correction. Wave 5 higher is in progress as a diagonal. Wave ((i)) of 5 is near complete and the index should continue moving sideways and higher to end wave 5 and the first leg wave (A) of the zig zag structure. After wave (A) ends, pair should see a pullback in 3, 7 or 11 swings within wave (B). As this correction stays above 3637.41 level, we are expecting more upside in wave (C) as an impulse structure.

SPX 60 Minutes Elliott Wave Chart

New Zealand ANZ business confidence improved from -62.6 to -56.7 in July. Own activity outlook rose from -9.1 to -8.7. Employment intentions rose from 0.7 to 1.1. Pricing intentions rose from 73.7 to 74.0. Inflation expectations rose from 6.02 to 6.23.

ANZ said that most activity indicators were little changed, but residential construction intentions plummeted again to a fresh record low (-73.7). Inflation pressures remain intense, but may be topping out.

It added: "New Zealand businesses are well aware that the Reserve Bank is on a mission to reduce customer demand for their wares in order to reduce inflation. No wonder they're feeling apprehensive."

Full release here.

Australia retail sales rose 0.2% mom to AUD 34.2B in June, below expectation of 0.4% mom. Through the year, sales rose 12.0% yoy.

Ben Dorber, head of retail statistics at the ABS, said: "While the 0.2 per cent rise in June 2022 was the sixth-straight rise in retail turnover, it was also the smallest so far this year....

"Given the increases in prices we've seen in the Consumer Price Index, it will also be important to look at changes in the volumes of retail goods, in next week's release of quarterly data."

Full release here.

Deputy Governor Masayoshi Amamiya said, "Japan's economy hasn't recovered yet to pre-pandemic levels... The foundations for an economic recovery remain weak and the outlook for wages is highly uncertain. As such, we need to support economic activity with accommodative monetary policy."

"Achieving our price target means having consumer inflation hit 2% on average over the business cycle, not a temporary rise to that level driven by exogenous factors such as increasing energy import costs," he emphasized.

Japan's CPI core (all-item ex fresh food), has been above BoJ's 2% target for three straight months. But officials are seeing it as temporary, at least until wage pressures build up.

US stocks staged a strong rebound overnight after Fed Chair Jerome Powell hinted that tightening could slow ahead. After yesterday's 75bps hike, federal funds rate is now at 2.25-2.50%, close to the 2.5% neutral rate.

"While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then," Powell said. "We will continue to make our decisions meeting by meeting, and communicate our thinking as clearly as possible."

"As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation," he also noted.

DOW rose 436 pts or 1.37% to close at 31799. Rebound from 29653.29 is resuming and the break above 55 day EMA again is a positive signal. Further rally is now in favor, as long as 31534.08 minor support holds, towards 33272.34 resistance. Firm break there will add to the case that whole corrective fall from 36952.65 has completed.

Summary

• The FOMC raised rates by 75 bps at today's meeting, which was widely expected.
• All 12 voting members of the Committee supported the decision to hike rates by 75 bps.
• Inflation remains forefront in the minds of most Committee members. The statement announcing the decision to hike rates noted that "the Committee is strongly committed to returning inflation to its 2 percent objective."
• But the FOMC also made a reference to recent data indicating that the pace of economic activity has downshifted.
• The statement indicated that more tightening likely will be appropriate. In our view, the degree of tightening will depend on incoming data.
• Strong labor market data and/or continued hot inflation data likely would prompt the Committee to hike by another 75 bps in September. Conversely, weak labor market data and/or lower inflation likely would result in a smaller rate hike.
• In short, the FOMC is edging into data dependency mode. Stay tuned.

FOMC Raises Rates by 75 bps, but Downgrades Assessment of the Economy

As widely expected, the Federal Open Market Committee (FOMC) raised its target range today for the federal funds rate by 75 bps, bringing the top end of the range to 2.50%. There was widespread support for another supersized rate hike—the FOMC raised rates by 75 bps at its last meeting in June—as all 12 voting members of the Committee voted in favor today. The FOMC has now hiked rates by 225 bps since March, a pace of tightening that has not been experienced in more than 40 years.

In explaining its decision to tighten policy further today, the Committee again pointed to the fact that "inflation remains elevated." Indeed, the year-over-year rate of CPI inflation rose from 8.6% in May to 9.1% in June, which was higher than most market participants, and likely most FOMC members, had expected at the time. The statement also reiterated that "the Committee is strongly committed to returning inflation to its 2 percent objective." This sentence, which was used previously in the June statement, in conjunction with the unanimous vote to raise rates by another 75 bps today, indicates that inflation remains forefront in the minds of most FOMC members.

That said, the FOMC downgraded its assessment of the current state of economic activity. Following the June FOMC meeting, the Committee noted that "overall economic activity appears to have picked up." But today's statement began with the following sentence: "Recent indicators of spending and production have softened." In that regard, the ISM services index, which measures the pace of activity in the service sector, has moved lower in recent months, although it remains above the line separating expansion from contraction. The comparable index for the manufacturing sector also moved lower in June Real GDP data for Q2-2022 are slated to print Thursday morning at 8:30 EDT. Although we project that real GDP inched higher in the second quarter, a negative print is entirely possible. If so, then real GDP would have contracted for two consecutive quarters, although as we discuss in more detail in a recent report, that outcome, should it occur, would not necessarily mean that the economy is currently in recession.

FOMC Moving into Data Dependency Mode

Looking forward, the Committee indicated that more tightening is likely. When the FOMC hiked rates by 75 bps on June 15, the statement said the Committee anticipated that "ongoing increases in the target range will be appropriate." Today's statement repeated that phrase. So how much tightening should we expect at the next FOMC meeting on September 21? We currently expect another 75 bps rate hike on September 21, but we readily acknowledge that the degree of tightening will depend crucially on incoming data over the intervening period. Four data releases stand out to us as vitally important. Specifically, there will be two employment reports (August 5 and September 2) and two CPI releases (August 10 and September 13) between now and the next FOMC meeting. If the labor market reports show continued strength and/or CPI inflation continues to come in hot, then yet another 75 bps rate hike would be likely. Conversely, if the employment reports show signs of labor market weakening and/or inflation comes in lower than expected, then the FOMC likely would opt to raise rates by a smaller amount.

In short, the FOMC is edging into data dependency mode. That is, the Committee has wanted to raise rates as fast as possible in recent months to get the fed funds rate back to some measure of "neutral." ("Neutral" is the setting of the fed funds rate that is neither stimulating the economy nor restraining it). Although there is no precise estimate of "neutral," most FOMC members would place it somewhere in the vicinity of 2-1/2% based on the Summary of Economic Projections. Our inference of the onset of data dependency mode was supported by a statement by Chair Powell in his post-meeting press conference. Specifically, Powell said that the pace of further tightening "will depend on incoming data and the evolving outlook for the economy." Stay tuned.

The move to a broadly neutral stance and the circumstances the US economy faces are increasingly leading the FOMC to take a more balanced view of the risks regarding inflation and activity.

The July FOMC meeting saw a very important shift in the Committee’s communications regarding the future path of policy, with Chair Powell highlighting in the press conference that the Committee no longer feel behind the curve and can now assess the appropriateness of policy “meeting by meeting”.

In that regard, there was also a significant pivot in the opening sentence of the decision statement, with June’s “Overall economic activity appears to have picked up after edging down in the first quarter” replaced with “Recent indicators of spending and production have softened” in July.

However, this is not to say that the rate-hike cycle is complete or even that a pause is coming. Throughout the press conference, Chair Powell talked up the strength of the economy, despite a poor run of activity data, as well as the lingering upside risks for inflation. On interest rates specifically, he also made clear the Committee’s belief that policy needed to be “moderately restrictive” instead of broadly neutral as it is now at 2.375% – in the FOMC’s view.

To our mind, the most likely course for policy from here remains a 50bp increase at the September meeting – taking the fed funds rate to the upper end of the FOMC’s 2-3% neutral range – followed by two 25bp increases to 3.375% at December. But risks to this view look as though they are transitioning from being skewed to the upside to the downside.

It is obvious that inflation is currently far too high and, as yet, unclear whether the pulse is sustainably decelerating. However, Chair Powell was crystal clear in the press conference that policy acts with a lag, believing that “significant further tightening” is in the pipeline. Further, while the labour market continues to be assessed as strong, the singular reference in the Q&A to the stalling of household survey employment over the past three months makes apparent that the FOMC believe job creation has slowed materially and is at immediate risk. Regarding the outlook, we would add the additional concerns of rapidly decelerating hourly earnings growth; a household savings rate already back at pre-pandemic levels; and record-low University of Michigan consumer sentiment which argues for weak and delayed transmission of future income growth to spending.

Also notable in Chair Powell’s remarks is that, now that their stance is broadly neutral, risks related to inflation are no longer the Committee’s pre-eminent concern. Instead they are to be balanced with the building downside risks for activity and employment, resulting in a desire to undertake “just the right amount of tightening” to bring about below-trend growth and “not make a mistake” by creating the pre-conditions for recession.

For the policy outlook into year-end, it will therefore be as important to fully assess the labour market detail as the components of inflation. On employment, the pace of job creation in the establishment and household surveys; the pipeline of new openings from JOLTS; and any signs of accelerating redundancies via initial claims will all matter. For inflation, critical will be the degree to which inflation is within the FOMC’s influence or an uncontrollable force for policy, with the latter possibility better regarded as a tax on households’ real income and economic activity than an inflation risk the FOMC need to act against. Note, this more nuanced assessment of inflation risks will still need to be made in the context of developments in inflation expectations which the Committee assess through a number of measures.

As we have long emphasised, a continuous assessment of financial conditions is also necessary when calibrating policy. Term interest rates, at which economic agents borrow, have been heavy of late. If they track lower still, the FOMC will have scope to raise the fed funds rate further without a cost to the economy through market interest rates or the US dollar, all else equal. Alternatively, if quantitative tightening and the risks clouding the outlook see credit spreads widen, the FOMC will have less capacity to raise the fed funds rate, with some of the required tightening of financial conditions coming instead from market participants.

Regardless, given our inflation and growth forecasts, we believe the policy debate can turn to rate cuts in 2023. While somewhat more cautious than the market with respect to the timing of these cuts, by late-2023 we see the case for 125bps of cuts from December quarter 2023 to December quarter 2024 having been made as restoring growth back near trend by the close of 2024 becomes the FOMC’s key policy objective.

The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate to the 2.25% to 2.50% range and will continue its balance sheet runoff.

The Fed updated its language to reflect recent economic data, stating that "indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low."

On rising prices, the statement noted that "inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."

All of the members of the FOMC voted in favor of the decision.

Key Implications

The Fed met market expectations with a unanimous 75 basis-point hike, contrary to the prior meeting where there was one dissention in favor of 50 basis points. Clearly developments on the inflation slide left little doubt this time around. With all members onside to keep tightening the screws on demand, expectations are for continued rate hikes as the Fed aggressively attempts to bring down inflation.

Market pricing is looking for another 50 basis-point hike in September and has the policy rate reaching to upwards of 3.5% by year-end. With this policy path and the rising risk of recession in the U.S., the yield curve is moving even further into negative territory. Chair Powell is on deck to speak. He will have to walk a fine line as he justifies the Fed's actions against the growing downside risks.

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https://www.youtube.com/watch?v=P-97NiA1sY8