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S&P 500 Clobbered by Fed’s Hawkish Guidance, NFP Eyed for Market Direction

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  • The S&P 500 slides for the fourth straight day and reaches its lowest level since October 21
  • Market sentiment remains cautious after the Federal Reserve signaled it may take the terminal rate higher than previously expected in an effort to curb inflation
  • The U.S. employment report for October will steal the limelight on Friday

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U.S. stocks posted sharp losses on Thursday, but ended the session off their worst levels, amid cautious sentiment following yesterday’s FOMC decision. For context, the Fed raised borrowing costs by 75 basis points to 3.75%-4.0% at its November conclave, and signaled that it may slow the pace of hikes at upcoming meetings.

While the Fed admitted that it could move to a slower cycle, it also acknowledged that it is premature to think about a pause and that the ultimate destination of interest rates will be higher than initially expected. This hawkish outlook spooked investors, prompting the market to reprice higher the path of monetary policy and denting appetite for equities.

Against this backdrop, the S&P 500 fell 1.06% to 3,719, its lowest mark since October 21, with the information technology and telecommunications sectors leading the rout on Wall Street. Meanwhile, the Nasdaq 100 plunged 1.98% to 10,690 , dragged down by a jump in Treasury yields that saw the 2-year note briefly top 4.75%, the highest reading since July 2007.

Looking ahead, investors’ attention will turn to the October U.S. employment report, due out Friday morning. According to a Bloomberg News survey, the economy generated 200,000 jobs last month, after adding 288,000 workers in September.

For sentiment to improve, NFP results have to come on the soft side and point to a significant slowdown in hiring. This may sound counterintuitive, but the Fed needs a weaker labor market to bring inflation down faster, otherwise it will not deviate from its aggressive tightening path for the foreseeable future.

On the other hand, if the nonfarm payrolls numbers surprise to the upside, all bets are off. This scenario could push up FOMC terminal rate expectations, fueling volatility and weighing on risk assets in general.

Recommended by Diego Colman

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After this week’s pullback, the S&P 500 has fallen towards a key technical support in the 3,715 area. If bulls fail to defend this floor and prices break below it in the coming days, selling pressure could accelerate, paving the way for a move towards 3,640, followed by 3,575.

On the flip side, if the equity index bounces off current levels, initial resistance appears at the psychological 3,800 handle. If buyers manage to push the S&P 500 atop this barrier, we can’t rule out a rally towards 3,900.


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S&P 500 Chart Prepared Using TradingView


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—Written by Diego Colman, Market Strategist for DailyFX

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