A Market View From Happy Hour - Optimistic Expectations

A big misconception about the FED's rate raising path is that just because we've achieved their terminal rate of 5.1% does not mean that they won't continue to raise rates later in order to beat inflation. The current expectation of the FED during the FOMC meeting next week is that rates will stay the same and that the FED is going to "pause" rate changes. The May Jobs report helped lift the prospect of a rate pause but that data combined with the CPI report next week could mean otherwise.

Late last month, the PCE report indicated continued stickiness in consumer prices and the CPI report being released on June 13th at 8:30AM Eastern could show the same thing, leading to a change in market sentiment over rates. With a robust jobs market, companies have an incentive to keep prices high since they know consumers are being paid. The concern that should be on everyone's mind is the record high household debt on which the nation is currently seeing increasing defaults. If jobs can't sustain this strength, that shakey debt load can push banks to tighten lending, rapidly cooling the economy.

This isn't to say that there won't be a "pause" or even a "skip" in rate changes announced at this upcoming meeting, but there's data to fuel the suggestion that the FED could do otherwise. It is to say, however, that the current expectations are optimisitic. The FED will meet two more times before they meet again in September, as no meeting is scheduled for August. The FED members will be in Jackson Hole WY for their annual symposium that month.

Tomorrow's big economic news are reports on ADP Employment Change, Trade Balances, and Canada's Interest Rate Decision but there are certain headwinds manifesting that can become a problem for stocks. One development to keep on your radar is the Port of Los Angeles shutting down over contract negotiations between the Pacific Maritime Association (PMA) and the International Longshore and Warehouse Union (ILWU). This can affect supply chains and lead to backlogs in other ports when ships are rerouted, as is currently happening with other west coast ports. Another problem for equity markets is the issuance of new debt since the debt limit bill became law. Money that would have otherwise found its way into stocks will go into the Treasury market. 

Today's candle looks more bullish than yesterday's on this daily SPY SPY chart and nearly bounced off the "Pandemic Trend Line" in white. With the 432 handle expected to be a big level of resistance, the RSI on the verge of overbought, and the VIX printing multi-year lows, the market is signaling a topping out soon. While there may be pullback from any near-term top, this market could continue to extend higher afterwards for no fundamental reason, fanning the flames of optimisitc expectations.

Join Benzinga's exclusive Happy Hour sessions every Monday - Thursday after the closing bell!