S&P 500 and Forex Analysis

S&P 500 and Global Macro Forecast

The FOMC's commitment to 50 basis point rises over the next two sessions signals the Board's determination to tighten financial conditions to drive inflation down while avoiding market volatility. However, a steeper yield curve combined with higher rates shows that investors are skeptical of the Fed's ability to control inflation.

Much of this has to do with how Treasury rates and inflation expectations have behaved. Despite the Fed turning more hawkish, the market's inflation forecast remains unchanged.

The Federal Reserve and US inflation have been involved in a contest to see who can be the most hawkish, but the Fed constantly appears to be playing catch-up.

As markets assess increased near-term policy certainty vs medium-term inflation uncertainty, investors continue to be concerned about central banks' capacity to successfully combat inflation. The longer this goes on, the more investor fear will rise, putting downward pressure on markets.

The unexpected strength of 1Q profit reporting has been overshadowed by tightening financial conditions. The market's future direction will be determined by the Fed's fight against inflation.

Given the unrest in Ukraine and China's economic troubles, the Fed will find it difficult to hike interest rates quickly without sending the US economy into a tailspin. And, as if the ominous "Fed behind the curve" combination wasn't enough, risk sentient continues to price in a recession via the global benchmark S&P 500. As a result, I believe risk is heading down as stock market players attempt to price in a recession via the S&P 500.