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Market Eyes Fed’s Next Move & Remains Cautious Amid Earning Season

U.S. stocks closed lower on Friday, 14th April 2023, but a strong afternoon rally helped mitigate the losses. 

Earlier in the week, the market saw a boost from better-than-expected CPI and PPI data, which encouraged dip buyers to come back into the markets. 

The trend continued on Friday, when JPMorgan, Citi Group, and Wells Fargo all reported better-than-expected results, giving the market some confidence that the banking crisis may be behind us. 

Traders have now turned their focus on the Federal Reserve’s next move. According to the CME Fed watch tool, traders believe that the most likely scenario is a 25-basis point increase and many are anticipating that this will be the last of the Fed hikes. 

On the other hand, U.S. Treasury yields rose on Friday, lifting the 10-year and 30-year rates to their biggest weekly gains in 2 months.  

For the week, the Dow Jones jumped 1.2%, while the S&P 500 gained 0.8% and the Nasdaq Composite added 0.3%. 

Here are the closing levels on Friday, 14th April 2023:

 Last Change %Change 
Dow Jones 33,886.47. -143.22. -0.42% 
S&P 500 4,137.64 -8.58 -0.21% 
Nasdaq Comp 12,123.47 -42.80. -0.35% 
US 10Y 3.51%   
VIX  17.07 -0.73 -4.1% 

The market has once again refused to give in to any selling. 

Data or news that caused any selling has once again been met by the dip buying army. 

This has really frustrated the shorts and sellers; however, buyers are beginning to wonder if the market is capable of going much higher. 

Valuations are beginning to look stretched and with more and more calls for recession, earnings could be affected. Investors are still hanging on to the possibility of rate cuts at the latter part of the year, which will be tested soon enough as we head into the 2nd quarter of the year. 

The market’s current pricing reflects this outlook, which has prevented any major selloffs in the face of higher interest rates. 

As earning season kicks off, we could get more insight into where this market should be going. 

Will it give fuel to the buyers and break out to new highs or will the pressure of lower forward guidance bring the sellers back in?

The market has been in a relatively tight range with the VIX at 17. This could mean low volatility is expected through the earnings release or possibly the calm before the storm.

Source: CBOE, Bloomberg. 

This commentary is written by James Gomes.
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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