Fed Maintains Hawkish Outlook for Q1 2023

As the opening bell signaled the start of the trading day, the market was hit by a wave of volatility as traders awaited an upcoming catalyst that could potentially move the market. With just fifteen minutes to go until the release of the U.S Institute of Supply Management (ISM) manufacturing purchasing managers index (PMI) at 9:45 a.m. Eastern time, market conditions were unstable and uncertain, with traders unable to establish any clear direction. 

ISM Signifies No Improvement in December

Once the economic data was released, the market reacted negatively and slid lower. This reaction was driven by the actual ISM report coming in below the median forecast. December data showed a value of 48.80, while the expectation was set at 48.5. While this miss may not seem significant, it is still lower than the previous month’s value of 49.0 and continues to signal a lack of economic improvement.

Fed Changes Tone from Last Meeting 

During the Federal Open Market Committee (FOMC) meeting, a few key points were noted that are likely to continue influencing the market. One such point was that Federal Reserve (Fed) officials stated that “further rate increases would be necessary” and that they agree that rate cuts should not happen in 2023.

These comments from the FOMC meeting left the market uncertain, as the initial rally was quickly sold off following their release. During the fourth quarter of 2022, there had been speculation that rate cuts might be on the horizon, but these statements from the Fed have called that possibility into question. 

During the FOMC event, Federal Reserve officials noted that the tight labor market contributes to ongoing inflation concerns. With the job market now being specifically called out as a factor to watch, labor market reports will likely significantly impact the overall market moving forward.

The market remained volatile and indecisive for the remainder of the trading session. While it is not uncommon for new information to immediately trigger a major market move, the combination of this additional information and the tight range within which the S&P 500 futures are currently trading suggests that a significant move may be imminent.

Job Reports May Be More Impactful Moving Forward

Tomorrow marks the first time that multiple job reports will be released since the Federal Reserve highlighted the importance of the labor market in its recent FOMC meeting. To begin the day, the Automatic Data Processing (ADP) national employment report is scheduled to be released at 8:15 a.m. Eastern time, before the opening of the cash session. This will be followed by the release of initial and continuing jobless claims at 8:30 a.m. Eastern time. 

First Green Day of 2023

The Nasdaq and the S&P 500 were positive to close the session. The S&P 500 closed up 0.77%, gaining 30 points, while the Nasdaq closed up 0.59%, an increase of 61 points. The Dow Jones followed, closing up 0.32%, adding 105 points.