Fed rate debate, tensions in Ukraine could shake markets in the week ahead

Stocks are expected to be volatile over the coming week as investors monitor tensions between Russia and Ukraine and debate how quickly the Federal Reserve can raise interest rates.

Markets were jolted last week and bond yields soared after strong inflation on Thursday upended many Wall Street forecasts for interest rate hikes. Investors received another blow on Friday after the White House warned that Russia could invade Ukraine during the Olympics. The United States and the United Kingdom have called on their citizens to leave Ukraine as soon as possible.

“I think the Fed is keeping everyone on edge, and that’s going to add to that nervousness,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “So we had a three-week respite on macro earnings. We went micro, and this week we were reminded that earnings season was pretty much over and all the macro issues were big again. “

Major averages fell sharply on Friday afternoon and Treasury yields rose above the highs they had set after Thursday’s report that the January consumer price index jumped 7.5%, a peak in 40 years. The S&P 500 lost 1.8% for the week, falling to 4,418.

With about two hours remaining in Friday’s talks, US national security adviser Jake Sullivan told a White House briefing that there were signs of Russian escalation on the Ukrainian border. . Sullivan said it was possible an invasion could happen during the Olympics, despite speculation to the contrary.

“So far I would say it was all about monetary policy. That throws an additional unknown into the works,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The dollar is recovering, oil prices have rallied and stocks are selling…Even if nothing happens this weekend, people will be nervous about it next week.”

Boockvar said Russian tensions were complicating the central bank’s outlook and an invasion would add to already high global inflation. “That causes problems for the Fed because it would essentially inflate oil prices, food prices, wheat, fertilizers and everything else and make the Fed’s inflation-fighting ability much more difficult to maneuver,” he said. “The Fed can’t back down. You can’t blame geopolitics as the reason for not raising rates.”

He said if the central bank was worried about an economic impact, it could slow the rises.

The Fed’s fight against inflation

On Friday morning, some economists had raised their expectations for the Fed to raise interest rates by half a point in March, following January’s inflation report. Others, like economists at Goldman Sachs, have been increasing their views at a faster pace, with as many as seven quarter-point hikes for this year.

Fed speakers will be a highlight of the week ahead, especially St. Louis Fed President James Bullard, who appears on CNBC’s “Squawk Box” Monday at 8:30 a.m. Bullard added to the market turmoil and surge in bond yields on Thursday when he said he would like to see rates rise 100 basis points (or 1 percentage point) by July.

“I think volatility remains high as we essentially move from this more dovish Fed to this more hawkish Fed policy that we know,” said Patrick Palfrey, senior equity strategist at Credit Suisse. “We haven’t decided yet how hawkish we’re going to be and until we can chart a new course for interest rate hikes with some consistency, I think volatility is going to stay elevated, and this will be more true for high valuation companies.”

What to watch

The Federal Reserve releases the minutes of its last meeting on Wednesday. Investors will be watching it closely for any new insight into its rate hike plans, inflation outlook or comments on its balance sheet.

There will also be more important inflation data, when the producer price index is released on Tuesday. This report is also expected to be very hot, following January’s CPI. Soaring inflation has sent consumer confidence plummeting, and now economists are watching consumer spending closely. This means that January retail sales will also be important when released on Wednesday.

There’s also a final wave of big earnings reports, with Cisco, Nvidia and AIG on Wednesday. Walmart reports Thursday and Deere reports Friday.

“We’re starting to get past the earnings, I think investors have been pretty reassured that profit margins have remained this high,” Palfrey said. “I think the question is, as we look to the next two quarters, are we able to pass on prices at the same pace?”

Fed debate

Palfrey said investors are looking for clearer communications from the central bank. Bullard is the only Fed official to have approved a 50 basis point hike, while others, like Cleveland Fed President Loretta Mester, have said she does not expect to raise the rate. federal funds target rate by more than a quarter point. Fed Chairman Jerome Powell left the door open for a half-point hike but did not say he was in favor of it.

Fed Governor Lael Brainard speaks on Friday, as does Fed Governor Christopher Waller. Mester speaks on Thursday.

Other Fed officials pushed back on Bullard’s comments. But there’s still a high level of uncertainty in the market, and bond pros are wondering if the St. Louis Fed chief will back down on his comments Monday morning.

Liz Ann Sonders, chief investment strategist at Charles Schwab, said some investors are wondering if market volatility could slow the process of central bank tightening.

“The Fed is full steam ahead. They need to be… They’re still adding to the balance sheet. We’re still zero on rates,” she said. “There’s nothing on my mind, unless an asteroid lands on earth and blows us all to pieces, it makes the Fed say we’re fine, we’re going to stay zero.”

“They admit they’re behind the curve. They let the inflation cat out of the bag. I don’t think they thought it would have the traction it had,” she said. declared.

Assess the rally and vice versa

When bonds sell, yields rise and they jumped last week. The 10-year yield was as high as 2.06% on Friday. After the Ukrainian news, the 10-year yield fell back to around 1.93%.

The 2-year yield was at a high of 1.63% on Friday, down from 1.32% the previous week. The biggest moves were on Thursday, and the yield on the 2-year note moved more than 20 basis points on Thursday. But by Friday afternoon, it had fallen back to 1.51%.

Calendar for the coming week

Monday

Earnings: Avis Budget, Vornado Realty, Advance Auto Parts, BHP Group, Weber, Brookdale Senior Living

8:30 a.m. St. Louis Fed President James Bullard on CNBC’s Squawk Box

Tuesday

Earnings: Marriott, Airbnb, Wynn Resorts, ViacomCBS, Akamai, Lattice Semiconductor, Adaptive Biotech, Denny’s, Devon Energy, ZoomInfo, La-Z-Boy, Wyndham Hotels, Toast, Upstart Holdings, BorgWarner, Restaurant Brands, Zoetis, Roblox

8:30 PPI

8:30 a.m. Empire State making

2:00 p.m. ICT data

Wednesday

Earnings: Cisco Systems, Nvidia, TripAdvisor, AIG, DoorDash, Applied Materials, Hyatt Hotels, Kraft Heinz, Hilton Worldwide, Pioneer Natural Resources, Cheesecake Factory, Marathon Oil, Boston Beer, AMC Networks, Generac, Owens Corning, Analog Devices, Barrick Gold, Vulcan Materials, Community Health, American Water Works, Ryder System

8:30 a.m. Retail

8:30 a.m. Import prices

8:30 a.m. Survey of business leaders

9:15 a.m. Industrial production

10:00 a.m. Business inventories

10:00 a.m. NAHB survey

2:00 p.m. Fed meeting report

Thusday

Earnings: Walmart, Airbus, Nestle, AutoNation, Dropbox, Roku, Shake Shack, Tanger Factory Outlet, Visteon, US Foods, Consolidated Edison, Yamana Gold, Liberty Global, Baxter International, Yeti, Southern Co, Reliance Steel, Palantir, Sealed Air, Realogy

8:30 a.m. First unemployment registrations

8:30 a.m. Start of housing

8:30 a.m. Philadelphia Fed Manufacturing

11:00 a.m. St. Louis Fed Bullard

5:00 p.m. Cleveland Fed President Loretta Mester

Friday

Earnings: Deere, Allianz, Bloomin’ Brands, Draftkings

10:00 a.m. Existing home sales

10:00 Q.S.S.

10:15 a.m. Fed Governor Christopher Waller and Chicago Fed President Charles Evans at the U.S. Monetary Policy Forum

11:00 a.m. New York Fed President John Williams

1:30 p.m. Fed Governor Lael Brainard at the U.S. Monetary Policy Forum


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