Nasdaq 100 Forecast: Is The Market Prepared For Fed Tapering Stimulus?

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  • The Nasdaq 100 index may be vulnerable to a deeper pullback if tapering fears intensify
  • The recent robust economic data raised the prospects of Fed tapering, although it may come in a slow and gradual manner
  • The Nasdaq 100 index is trading at 36.1 times price-to-earnings, about 2-SD above its five-year mean

The technology sector traded on the back foot towards the end of the week amid tapering fears after a robust ADP private payrolls report. The private sector added 978k jobs in May, hitting an eleven-month high and smashing the baseline forecast of a 650k increase (chart below). The pace of job creation appears to have accelerated over the past three months, underscoring a strong recovery in the labor market. Meanwhile, weekly jobless claims fell to a fresh pandemic low of 385k, versus a 390k forecast.

This led to a sharp rebound in the US Dollar and longer-dated Treasury yields, reflecting that the market is deeply concerned. The prospects of Fed tapering stimulus strengthened after Philadelphia Fed President Patrick Harker said it is appropriate “to slowly, carefully move back” on bond purchases at an appropriate time.

Although several Fed officials reiterated that inflationary pressures might be “transitory”, market participants remain jittery about rising price levels. A Bloomberg poll shows that economists are expecting US headline CPI figure to hit 4.6% YoY in May – the highest reading since 2008. The recent surge in crude oil, metals and agriculture prices may be reinforcing this assessment.

It seems that conditions are gradually maturing to warrant a debate among Fed officials about tapering stimulus. The critical part is at what pace will the central bank scale back its $ 120 billion per month bond purchases and when will it start. Before a clearer picture is drawn on that prospect, the markets may be reluctant to move significantly higher.

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