S&P 500 Holds Steady Amidst Earnings Reports, Investors Brace for Tightening Fed

April 19, 2023

The S&P 500 index closed nearly unchanged on Tuesday as investors analyzed a wave of corporate earnings reports and their impact on the US economy. The Dow Jones Industrial Average dipped slightly, while the Nasdaq Composite edged down a bit. Investors evaluated the latest batch of earnings reports, and although Bank of America beat first-quarter expectations, Goldman Sachs shares fell, and Johnson & Johnson’s stock dropped after the company beat estimates but lowered its 2023 guidance. Investors warn that profits topping already low expectations won’t matter to a market staring at a Federal Reserve that’s continuing to tighten into a potential recession.

Despite this, earnings season has so far proven resilient, and all the major averages are up since the period kicked off. However, more than eight out of ten traders anticipate a 25 basis point increase in interest rates next month, marking a stark contrast to the calls for a halt in hiking in March. Atlanta Federal Reserve President Raphael Bostic anticipates one more 25 basis point hike, followed by a hold at that level “for quite some time.” Earnings season continues with results from United Airlines and streaming giant Netflix.

On Tuesday, all sectors in the market saw an overall increase of 0.09%. Industrials, energy, and information technology were the top-performing sectors, with gains of 0.46%, 0.45%, and 0.41%, respectively. Materials and consumer staples also performed well, with gains of 0.40% and 0.33%. On the other hand, utilities, communication services, and healthcare sectors saw a decline of -0.51%, -0.65%, and -0.65%, respectively. The real estate sector had the biggest decline, down by -0.15%.

Major Pair Movement

On Tuesday, the dollar index decreased by 0.34%, despite the hawkish outlook of St. Louis Fed President James Bullard. The market is struggling to factor in more than one more 25bp U.S. interest rate hike. The dollar was impacted by the risk-on theme, which began when China’s Q1 GDP growth exceeded expectations. The ECB and BoE are expected to have more hikes, and the recovery of Chinese demand could assist non-U.S. exporters. Although Treasury yields and the dollar rebounded, the hawkish view remains at odds with the market, which is roughly pricing in only one more 25bp hike to 5%, followed by almost two 25bp rate cuts by year-end.

The EUR/USD rose 0.5%, while the GBP/USD increased by 0.4% due to the broader dollar setback and strong UK pay growth. GBP/USD traders are now focused on Wednesday’s UK inflation data, with overall inflation forecast at 9.8% versus 10.4% in February, yet vastly above the BoE’s 2% target. USD/JPY fell by 0.25%, and there is little U.S. data until Thursday, followed by Friday’s Global PMIs. Longer-term Treasury yields are driving prices, with the BoJ on hold.

Technical Analysis

EUR/USD (4 Hours)

The EUR/USD rose on Tuesday due to a weaker US Dollar, and it remained in a small range during the American session. The April German ZEW survey results were mixed, with the Economic Sentiment Index falling unexpectedly while the Current Situation Index improved. Wednesday’s economic calendar includes Euro Zone’s March Consumer inflation report, February Current Account, and Construction Output. The US Dollar fell on Tuesday, with little change in US yields and mixed performance on Wall Street. The Federal Reserve will release the Beige Book on Wednesday, and the latest comments from Fed officials suggest the possibility of one more rate hike. The market sees the ECB raising rates beyond May as Fed rate cuts got priced out, and the Euro Zone’s yields rose on Tuesday, offering support to EUR/USD.

Based on technical analysis, the EUR/USD saw a slight rally on Tuesday and broke the previous resistance level, reaching the middle band of the Bollinger band. It is expected that the market will continue to consolidate with a possibility of an upward movement toward the resistance level at 1.0998. The RSI is currently at a level of 51, indicating that the EUR/USD is in consolidation mode.

Resistance: 1.0998, 1.1026

Support: 1.0966, 1.0923

XAU/USD (4 Hours)

Gold initially rose on Tuesday, driven by optimism from China, reaching a high of $2,005.79 per troy ounce during Asian hours. However, the positive sentiment was short-lived as China’s Q1 Gross Domestic Product (GDP) showed that the economy grew by 2.2% in the three months to March, beating market expectations, but failed to boost risk appetite in European and American data. Wall Street opened lower but has since recovered slightly, and US Treasury yields remained stable. Despite the broad weakness of the US dollar, it found some demand during the European session due to tepid macroeconomic figures that weighed on high-yielding assets’ demand.

Based on technical analysis, XAU/USD is currently in a consolidation phase, but it has been able to move slightly higher and maintain its position above the $2,000 level. The price is currently situated in the middle band of the Bollinger band, which indicates a neutral trend in the market. The key support level is now at the $2,000 level. The RSI is hovering around the 45 levels but indicating that there is still potential for a slight upward movement.

Resistance: $2,010, $2,020

Support: $2,000, $1,990

Economic Data