The markets will be watching closely on Wednesday, for the monthly release of the Federal Reserve meeting minutes for June.
This ritual is typically met with an increase in volatility, depending on the wording of the statement and any new policy actions voted on by committee members.
One of the most important economic indicators that the Fed is using to guide policy decisions is jobs growth, which has continued on a better than expected pace of late.
That may ultimately translate to a quicker exit from the Fed’s monthly bond purchases, or raising benchmark interest rates to curb inflationary pressures.
The exact details of the Fed’s exit strategy from quantitative easing, along with future rate moves, is a hotly contested topic among economists and market experts.
No matter the verbiage, the SPDR S&P 500 ETF SPY will be a key indicator of stock market reaction on Wednesday after the minutes are released. SPY will almost certainly see an increase in volume and whipsawing price action. as traders digest the news and position themselves for the next leg higher or lower.
With the S&P 500 Index sitting near all-time highs and within close proximity to the psychologically significant 2,000 level, the stakes continue to mount for bulls to extend this recent rally.
Another important ETF to watch this week will be the iShares 20+ Treasury Bond ETF TLT. This index of long-term treasury bonds is very sensitive to changes in interest rates, which makes it an important indicator of fixed-income sentiment.
If bond investors believe rising interest rates near the horizon, we may see a selloff in TLT that could test the resilience of bonds in the first half of the year.
Lastly, the SPDR Gold Shares ETF GLD will find itself under a microscope on Wednesday -- as precious metals investors consider the impact of the Fed’s message. This gold bullion ETF has recently picked up some momentum, and is sitting in a precarious technical position that may induce additional volatility.
Precious metals investors may be counting on pessimism towards stocks or bonds in the coming months as a catalyst to higher prices.
As we get closer to a turning point in Federal Reserve decision making, the reaction to the news in these three ETFs will play an important role in future market behavior.
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