US Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency measure to protect the world’s largest economy from the impact of the coronavirus, during a news conference in Washington March 3, 2020.
Kevin Lamarque | Reuters
Stocks could trade sideways as investors await the outcome of the Federal Reserve’s June meeting next Wednesday afternoon.
The Fed’s two-day meeting is the big event for the markets in the coming week. While the central bank is not expected to take action, it could adjust its forecasts for interest rates and inflation, which market professionals say could be market-moving.
Shares lurched Friday and the S&P 500 ended at a new high, gaining 0.4% for the week.
“Markets must be over by Wednesday before anyone makes big bets,” said Scott Redler, Chief Strategic Officer at T3Live.com. “It’s really that the street is looking at the next big obstacle – that’s the Fed.”
The market is attuned to any discussion of the central bank’s asset purchase program. The program was launched during the pandemic to provide liquidity to the markets and keep interest rates low. The Fed is widely expected to acknowledge that it will begin phasing out that so-called quantitative easing program later this year.
In fact, once the central bank says it will cut its monthly $120 billion bond purchases, it signals a major shift in its policy from easing to tightening. The Fed is expected to signal a winding down well before it takes action, and its own forecast for interest rates shows no increases until 2023.
Fed Chair Jerome Powell briefs reporters after the central bank issued its statement at 2 p.m. ET on Wednesday. He is expected to sound calm and assure markets that Fed policy will remain easy.
“Let’s say for some reason Powell is letting us know that tapering could happen at the end of this year, not just talking about it, but doing it,” said Mike Schumacher, chief interest rate strategy at Wells Fargo. “That would shock the market, or if we get a big rise in inflation forecasts, the markets would be a little shocked.”
There are a few economic reports worth checking out, most notably Tuesday’s retail sales for May and the Producer Price Index – a look at producer-level inflation.
The Federal Reserve will also release its industrial manufacturing index data Tuesday, which measures production and capacity in manufacturing, mining and other industries.
“Essentially, I think nominal retail sales could be strong,” said Aneta Markowska, chief financial economist at Jefferies. “I just think the only thing the market cares about right now is employment because that’s the only thing that can move the needle on the Fed.”
Markets brushed off super-hot consumer inflation for May over the past week, Thursday reported. Economists said the 5% rise in the consumer price index appears to be a temporary reaction to the reopening of the economy, supply chain disruptions and pent-up demand. But they also said a few more reports are needed to make sure it isn’t more persistent than the Fed currently expects.
The central bank has said it expects inflation to be high for a short period of time before falling back closer to 2%. The Fed is likely to raise its 2.2% forecast for this year, given the jump in recent inflation measurements.
It also forecasts core inflation, as measured by the personal consumer spending price index, to reach 2% in 2022 and 2.1% in 2023.
Wells Fargo’s Schumacher said he is keeping a close eye on that inflation forecast, particularly for 2023. According to the Fed’s interest rate forecast, that also marks the first time a group of central bank officials have identified the potential for an increase in Fed Funds. see target interest.
So if inflation is higher in their view, the outlook for interest rates could be too. That could bring forward the forecast for the first rate hike, now forecast by a majority of the Fed in 2024.
“If that number goes up a tenth, that’s a non-event. If it goes up by 0.3, that’s a lot in terms of the way the Fed looks at the world,” Schumacher said. The Fed has said it will tolerate inflation above the 2% target for a period of time before taking action.
Jefferies’ Markowska doubts the Fed’s interest rate forecast will shift. The prediction is presented in a so-called “dot plot” with anonymous input from central bank officials.
She noted that the Federal Open Market Committee participants were split 11 to 7 in March against a 2023 rise, meaning three officials would have to change their minds to shift the median forecast.
“My base case is it won’t move,” she said. “I just feel like there hasn’t been enough definitive change in the data to really change the Fed’s forecast. That said, you only need three people to change your mind. Even if that average forecast goes up , Powell is just going to downplay it during the press conference.”
She pointed to the disappointing May employment report, which showed the creation of 559,000 jobs, 100,000 fewer than expected.
Stocks ended the week mixed with the Dow losing 0.8% at 34,479 points and the S&P 500 gaining 0.4% to end the week at a record 4,247. The Nasdaq, boosted by technology, gained nearly 1.9%, reaching 14,069. Meanwhile, the small-cap Russell 2000 outperformed the other indices, rising 2.2% for the week to reach 2.335.
REITs were the best-performing major sector this week, up 2%, followed by a 1.9% gain in healthcare. Consumer durables were up 1.6%. Tech was up 1.4%, helped by a decline in interest rates.
But the financial sector lost 2.4% as interest rates fell, and it was the worst performing sector this week. Financials, along with other cyclicals, such as materials, were down 2% for the week and industrials and services down 1.7%.
Meme stocks continued to be in the headlines and continued to trade with a high degree of volatility. GameStop hit a high of $344.66 on Tuesday and fell to $206.13 on Friday before closing at $233.34 a share.
In addition to the wild ride through meme stocks over the past week, the market to watch has been Treasury’s as yields showed a surprising drop. There was quite a dramatic movement in the 10-year benchmark interest rate, which has been the most watched by investors as it affects mortgages and other key lending rates.
The 10-year yield fell below 1.43% on Friday. Yields move opposite to price, so the downward move represented a buy boost.
“I feel like this whole move in Treasurys is technical and has nothing to do with the fundamentals,” Jefferies’ Markowska said. She said institutions are finding super-low interest rates on Treasury bills and the overnight money markets. “There’s just an excess of money flowing into the longer maturities,” she said. “People are still very short.”
Markowska said May’s weaker-than-expected jobs report prompted purchases, forcing some short investors, who bet on higher yields, to hedge those positions as interest rates fell.
The decline in 10-year yields, which peaked at 1.75% at the end of March, was positive for equities. It has also attracted some equity investors to technology and growth sectors, which had fallen out of favor.
“Most people in the market will tell you that yields will rise significantly at some point. The question is when,” Schumacher said. Many forecasters expect the 10-year yield to reach 2% by the end of the year.
Finally, investors will also follow the headlines of President Joe Biden’s trip to the UK and Europe, where he will attend the G-7 and meet with NATO allies. He will hold a summit with Russian President Vladimir Putin in Geneva on Wednesday.
Week ahead calendar
The Federal Open Market Committee begins a two-day meeting
Income: Oracle, La-Z-Boy, H&R Block
8:30 am Retail
8:30 a.m. PPI
9:15 am Empire State Production
10:00 am Industrial production
10:00 am Company Inventories
10:00 AM NAHB Survey
4:00 in the afternoon. TIC data
Income: Lennar, the honest company
8.30 am Start housing
8.30 am Import prices
8:30 am Survey of business leaders bedrijfs
2:00. FOMC statement
2.30 pm. Fed Chair Jerome Powell briefing
Income: Adobe, Kroger, Jabil, Commercial Metals, Smith and Wesson
8:30 am First unemployment applications
8:30 a.m. Philadelphia Fed Production