Fed could be a source of volatility as Powell speaks in the coming week

The Federal Reserve could remain a source of market anxiety next week, with President Jerome Powell testifying twice before Congress and expecting more than a dozen other Fed speeches.

The bond market’s response to the central bank over the past week has been extremely volatile.

Although the market was initially stable after the two-day Fed meeting and Powell’s briefing on Wednesday, there was a sharp decline in bonds and rising rates on Thursday. Traders have responded that the central bank is prepared to keep inflation and the economy warm while the labor market recovers.

In the coming week, professionals in the bond market Powell and other Fed members will be watching for further tips.

“It’s effects ‘- I would not call it day in the sun – it’s more like day in the tornado,’ said Michael Schumacher, head of course strategy at Wells Fargo. “Clearly, the bond market is the stock market that is currently being watched, and that is not normally the case.”

Shares were lower during the week, with the Dow up 0.5% and the S&P 500 up 0.7%. The Nasdaq Composition was 0.8% lower for the week.

However, the Russell 2000 was hit the hardest and lost almost 3% this week.

Yields rose higher as the market sold. Bond yields move inversely to price.

The standard 10-year treasury yield, which affects mortgage lending and other lending, rose to 1.75% on Thursday, a move of less than ten basis points in less than a day. It was 1.72% on Friday afternoon.

“The effect of the bond was huge, and it scared people,” Schumacher said.

“The question has been hanging around for a while: how much of a higher yield can some of the higher octane stocks take?” he asked. “There is no magic number, but as we speak, the decade is 80 basis points higher this year. It’s incredible.”

Powell testified Tuesday and Wednesday before congressional committees with Treasury Secretary Janet Yellen on Covid aid and the economy.

He also spoke at a Bank for International Settlements meeting on Monday morning about central banking innovation.

Other Central Bank speakers this week include Fed Vice President Richard Clarida, Vice President Randal Quarles, Fed Governor Lael Brainard and Fed President New York John Williams.

There is also some important information.

Major expenses include personal spending and spending on Friday, which includes the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation rose at an annual rate of 1.5% in January.

The Federal Reserve took no action during its two-day meeting last week, but did make new economic forecasts, including a 6.5% forecast for gross domestic product this year. The central bank’s forecast shows that PCE inflation will rise to 2.4% this year, but will fall to 2% next year.

The majority of Fed officials did not see any rate hikes until 2023.

Powell reiterated that the Fed is only seeing a temporary increase in inflation this year due to the base effects against last year’s prices.

The central bank will target an average inflation range of around 2%, so that the number may exceed the threshold for some time. This is a change in the Fed’s ground rules, which is making the bond market nervous.

Normally, the Fed would raise interest rates if inflation flared up to avoid an overheating economy and prevent a strong cycle.

“For the bond market and the Fed, there’s a communication problem and there’s a consensus problem. There can be no tension,” said Diane Swonk, chief economist at Grant Thornton.

“They will try to clear up the Fed’s message, but without a consensus on what the numbers and backs mean, it will be difficult,” she said. “They will declare themselves economists, and they will speak a different language than what the bond market speaks.”

Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, expects the bond market to be more volatile than equities, and that inflation will be problematic for both.

At some point, he expects that there could be a 10% correction in the stock market, and that inflation or a sharp shift in bond yields could be a cause.

“The market is trying to make sense of what can be seen as a breach, between their economic forecasts and the Fed’s dual mandate of unemployment and inflation,” Grohowski said.

“Yet they are committed to keeping short rates until the end of 2023,” he said. “This is what the market is struggling with. I think it’s disturbing to me to hear words like ‘surplus’.”

Grohowski expects to continue to call the ‘big rotation’ of technology and growth stocks in cycles and value. Growth and technology were the most sensitive to rising rates, and the Nasdaq corrected more than 10%.

“I think we’re in the sixth or seventh innings of a nine – over game. It’s not over yet, but I think we’ve seen most of the big turnaround out of growth, in value,” said Grohowski. He said the view depended on the fact that the ten years would not rise much more than 1.75%.

Grohowski is concerned about the Fed’s willingness to let inflation surpass, as inflation is negative for equities.

Supply chain issues are a source of concern. He pointed out on Thursday Nike’s remarks that its sales had been damaged by the congestion of ports, as well as the shortage of semiconductors affecting car production.

“Inflation expectations are difficult for P / E [price-earnings] relationships, “Grohowski said. [stock] the market trades at 22 times our estimate for the year’s earnings. ‘

He said the market was having difficulty reconciling the lack of projected interest rate hikes with the strength of the Fed’s economic forecast.

“If you ask me why I’m losing sleep? … That’s too much of a good thing. Too much of a good thing is too accommodating,” Grohowski said.

Schumacher said there is a chance the bond market will be able to stabilize in the next few weeks, even if yields are fair.

He said corporate pension funds could probably redistribute capital into bonds before the end of the quarter, and that could be supportive. As Japan’s fiscal year begins, new purchases could also be made in U.S. treasuries because U.S. debt looks very cheap, Schumacher said.

He is also watching treasury auctions next week.

Treasury auctions $ 60 billion 2-year notes Tuesday; $ 61 billion 5-year notes Wednesday, and $ 62 billion 7-year notes Thursday.

Schumacher is particularly watching the 7-year auction, which drew weak demand last month.

Monday

Earnings: Tencent Music Entertainment

9:00 a.m. Fed Chairman Jerome Powell at the Bank for International Settlement Summit

10:00 AM Existing home sales

10:00 Quarterly financial report

13:00 San Francisco Fed President Mary Daly

13:30 Fed Vice President Randal Quarles

19:15 Fed Governor Michelle Bowman

Tuesday

Earnings: Adobe, IHS Markit, DouYu, GameStop, Steelcase

08:30 Current account

9:00 a.m. The president of St. Louis, James Bullard

10:00 New home sales

12:00 Fed Chairman Powell, Treasury Secretary Janet Yellen at House Financial Services Committee

13:00 Treasury auctions $ 60 billion 2-year notes

13:25 Fed Governor Lael Brainard

13:45 New York Fed President John Williams

15:45 Fed Governor Brainard

16:20 St. Louis Fed’s Bullard

Wednesday

Earnings: General Mills, Shoe Carnival, KB Home, RH, Tencent, Embraer, Winnebago

08:30 Durable goods

09:45 PMI for manufacturing

09:45 PMI Services

10 a.m .: Fed Chairman Powell, Treasury Secretary Yellen at Senate Banking Committee

13:00 Treasury auctions $ 61 billion 5-year notes

13:35 New York Fed’s Williams

15:00 San Francisco Fed’s Daly

19:00 Chicago Fed President Charles Evans

Thursday

Earnings: Darden Restaurant

05:30 Williams from New York Fed

08:30 Initial claims

08:30 Q4 GDP third reading

10:10 am Fed Vice President Richard Clarida

10:30 am New York Fed’s Williams

13:00 Treasury auctions $ 62 billion 7-year notes

13:00 Chicago Fed’s Evans

19:00 San Francisco Fed’s Daly

Friday

08:30 Personal income / expenditure

08:30 Pre-economic indicators

10:00 Consumer sentiment