Stocks poised for monthly decline, dollar rebounds ahead of significant data and Fed influence

On Tuesday, U.S. stocks followed the downward trend seen in global markets, heading lower for the month as investors awaited crucial economic data releases and the outcome of the Federal Reserve's two-day policy meeting.

The dollar strengthened, and gold prices declined after a report showed higher-than-expected growth in employment costs, which is unlikely to alter the Fed's stance on interest rates. Major U.S. indexes are poised for their first monthly losses since October, reflecting a period of consolidation following the strong rally earlier in the year.

Jay Hatfield, portfolio manager at InfraCap in New York, expressed that the sell-off was triggered by the higher-than-expected employment cost index.

He also added:

And investors are positioning ahead of what is likely to be a hawkish press conference following the Fed meeting.

Jay Hatfield

The three primary U.S. indexes marked their initial monthly percentage declines since October.

Furthermore, Sam Stovall, chief investment strategist at CFRA Research, noted that the market may be taking a breather to digest the gains made earlier, suggesting that the old adage "sell in May" might be coming true a bit earlier than expected.

We have reached new highs in the S&P this year, but there comes a time when a market needs to digest those gains. The old 'sell in May' adage might have come true a month early.

Sam Stovall

The Federal Reserve's Open Market Committee convenes to discuss monetary policy, with expectations that the Fed will leave the target rate unchanged. Investors are keenly watching for any hints about future interest rate cuts in the accompanying statement and Fed Chair Jerome Powell's subsequent press conference.

Hatfield expressed:

We know the Fed is going to be hawkish, and there's going to be questions about rate increases. That will be the money answer, depending how much he pushes back on that.

Jay Hatfield

Stovall also commented on the market's response to recent Fed decisions, consumer behavior, and economic indicators, raising questions about potential rate cuts this year.

As first-quarter earnings season progresses, companies like Amazon.com and Apple Inc. are set to announce their results, providing further insights into the health of the economy and corporate earnings.

Analysts have revised upwards their estimates for S&P 500 first quarter earnings growth to 6.0% year-on-year, indicating resilience in the face of various headwinds. Despite this, the Dow Jones Industrial Average fell by 0.36%, the S&P 500 lost 0.18%, and the Nasdaq Composite dropped 0.22%, reflecting cautious sentiment among investors.

In Europe, stocks softened due to mixed corporate earnings, with the pan-European STOXX 600 index losing 0.31%. MSCI's global stock gauge and emerging market stocks both declined, while Asian shares outside Japan closed lower. However, Japan's Nikkei bucked the trend and rose, driven by positive sentiment in the region.

The dollar strengthened against a basket of currencies, and the yen weakened after suspected currency intervention by Japanese authorities. U.S. Treasury yields rose as investors awaited the Fed's decision, with benchmark 10-year notes yielding 4.6591%.

Crude prices fell amid easing geopolitical tensions and healthy U.S. crude output and exports. U.S. crude dropped to $81.39 per barrel, while Brent was last at $85.49. Gold prices declined ahead of the Fed meeting, but remained on track for their third consecutive monthly gain, dropping to $2,297.88 an ounce.

Significant implications are currencies, stocks, bonds, and commodities.

What's next?

Moreover, The Federal Reserve is widely expected to maintain its current stance on interest rates, but any hints of future rate cuts or tapering could cause significant shifts in the markets. Investors will also be closely watching for signs that the Fed may announce a slowdown in its balance sheet runoff under quantitative tightening.

Mixed economic data like employment cost index, consumer confidence, and PMI figures have given conflicting indications about the economy's health and monetary policy direction.

Furthermore, the Fed's decision on interest rates and its balance sheet tapering program will provide valuable insights into the central bank's expectations for the economy and inflation.

The selling in U.S. stocks was broad-based, with all three major indices experiencing losses, as investors digested mixed economic data and awaited the Federal Reserve's monetary policy decision.