Federal Reserve Chairman Jerome Powell will hear at the Senate Banking Committee hearing on the “CARES quarterly report to Congress” on Capitol Hill in Washington, USA, December 1, 2020.
Susan Walsh | Reuters
The Federal Reserve could remain a source of angst for markets in the coming week, with chairman Jerome Powell expected to test twice before Congress and more than a dozen more Fed speeches were expected.
Market views on links to the central bank last week were surprisingly volatile.
While the market was initially stable after Fed’s two-day meeting and Powell’s briefing on Wednesday, Thursday came with strong selling in bonds and spike rates. Traders have accepted the fact that the central bank is willing to let inflation and the economy run hot while the labor market recovers.
In the coming week, bond market professionals will be keeping an eye on Powell and another member of the Fed for further taxes.
“These are bands’ – I wouldn’t say it’s a day in the sun – it’s more like a day in the tornado, ”said Michael Schumacher, head of rate strategy at Wells Fargo. “It’s clear that the bond market is the one that the equity market is looking at right now, and that’s usually not the case.”
Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500, down 0.7%. The Nasdaq Composite fell 0.8% for the week.
The Russell 2000, however, hit the hardest hit, losing nearly 3% for the week.
Yield was higher when the market sold. Bond yields move abruptly to price.
The Treasury’s 10-year benchmark yield, which will affect mortgages and other loans, rose as high as 1.75% on Thursday, a move of more than 10 basis points in less than a day. It was at 1.72% on Friday afternoon.
“The bond movement has been huge, and it’s starting to scare people,” Schumacher said.
“This question has been hanging out there for a long time: What increase in yield can some of the highest octane stocks yield?” He asked. “There’s no magic number, but as we speak, the 10-year is up 80 basis points this year. It’s incredible.”
Powell will testify Tuesday and Wednesday before Congressional committees alongside Finance Secretary Janet Yellen on Covid’s relief efforts and the economy.
He will also speak on central bank innovation at the Bank for International Settlements event on Monday morning.
Other central bank speakers this week include Fed Vice Chairman Richard Clarida, Vice Chairman Randal Quarles, Fed Governor Lael Brainard, and New York Fed President John Williams.
Inflation and the food
There is some key data as well.
Important notifications include Friday ‘s personal consumption and consumption data, which includes the PCE deflator, the Fed’ s preferred inflation measure. PCE core inflation ran at an annual rate of 1.5% in January.
The Federal Reserve last week took no action at their two-day meeting, but introduced new economic forecasts of a 6.5% forecast for gross domestic product this year. The central bank’s forecast now shows PCE inflation going to 2.4% this year, but falling to 2% next year.
Most Fed officials have not seen any increase in interest rates through 2023.
Powell reiterated that the Fed will only see a temporary pickup in inflation this year due to the underlying effects against last year’s numbers when prices fell.
The central bank targets an average range of inflation around 2%, so that number may be higher than that level for some time. It is a change from the basic rules of the Fed, which makes the market of nervous connections.
The Fed would normally maintain flat rates if inflation rose to avoid an overheated economy and to prevent a cycle.
“For the bond market, and the Fed, there is a communication problem and there is a consensus problem. There can be no tension,” said Diane Swonk, chief economist at Grant Thornton.
“They will try to clarify the Fed’s message, but without a consensus on what these numbers and guards mean, it will be difficult,” she said. “They will define themselves as economists. , and they speak a different language than the link market speaks. “
Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, expects the bond market to be more volatile than stocks, and that inflation would be a problem for both.
At some point, it is expected that there could be a 10% stock market correction, and inflation or a sharp movement in bond yields could be a stimulus.
“The market is trying to make sense of what could be seen as a disconnect, between their economic projections and Fed’s double mandate on unemployment and inflation,” Grohowski said.
“However, they are committed to maintaining short rates until the end of 2023,” he said. “That is what the market is struggling with. I think it’s surprising to hear words like ‘overshoot. ‘”
Circulation from technology to tours
Grohowski expects what he calls the ‘massive circulation’ from technology and growth stocks to cycles and value following. Growth and technology have become more sensitive to rising rates, with the Nasdaq correcting more than 10%.
“I think we’re in the sixth or seventh inning of a nine-game in-game. It’s not over, but I think we’ve seen the lion’s share of the big spin out of growth, to value, “Grohowski said. He said that outlook is dependent on the 10-year not rising much higher than 1.75%.
Grohowski is concerned about the Fed’s willingness to allow inflation to pass because inflation is negative for stocks.
Supply chain issues are a concern. He pointed to Nike ‘s comments Thursday that sales were hurt by port congestion, as well as a shortage of semiconductors, which is affecting car production.
“Inflation is expected to be difficult for P / E. [price-earnings] ratios, “Grohowski said.” The [stock] the market is trading at 22 times our estimate for earnings this year. “
He said the market is having difficulty reconciling the lack of any expected interest rate hikes against the strength of the Fed’s economic outlook.
“If you ask me what I lose sleep with? … It’s too much of a good thing. Too much of a good thing is too appropriate,” Grohowski said.
Bond market management
Schumacher said there is a chance that the bond market could be stable in the next few weeks, even if yields tick.
He said corporate pension funds are likely to redistribute capital to bonds by the end of the March 31 quarter, which could be supportive. Also as Japan’s fiscal year is about to begin, U.S. Treasurys could also have a new buy because on the basis of currency change U.S. debt looks pretty cheap, Schumacher said.
He will also be watching the Treasury auction in the coming week.
The Treasury will sell $ 60 billion 2-year notes Tuesday; $ 61 billion 5-year notes Wednesday, and $ 62 billion notes $ 62 billion Thursday.
In particular, Schumacher is keeping an eye on the 7-year auction, which drew a bad demand last month.
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