Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 26, 2022.
Brendan McDermid | Reuters
Federal Reserve Chairman Jerome Powell testifies before Congress next week and the markets will depend on what he has to say about how The Russia-Ukraine conflict could affect Fed policy.
Powell will present his testimony on the economy before the House Financial Services Committee on Wednesday morning, and then again before the Senate Banking Committee on Thursday. The key February jobs report will be released on Friday.
“Speaking to Powell will be important,” said Jim Caron, head of global fixed-income macro strategy at Morgan Stanley Investment Management.
Investors are also watching carefully Russia invaded Ukraine, and it’s related market impact, with Russia being a major commodity exporter. Oil initially spiked over the past week, with Brent crude rising to $105 a barrel before falling back to around $98 on Friday.
Diane Swonk, chief economist at Grant Thornton. “It is sparking an inflationary fire.”
Market reversal
The S&P 500 posted a weekly gain after some wild volatility. Shares fell sharply on Thursday on news of the invasion, but have since rallied again. The index extended that rally on Friday, gaining more than 2%. Bond yields, which were initially lower in a flight-to-safety trade, reversed course and were higher on Friday.
“Treasures are considered safe for flight, and you didn’t monetize Treasuries when there was a geopolitical event,” Caron said. Yields changed inversely to prices, and the 10-year yield was back near 2% on Friday. “There’s nowhere to run, nowhere to hide. I think a lot of that has to do with people’s expectations for interest rate policy and also for inflation.”
Jeff Kleintop, global investment strategist at Charles Schwab, said the stock market was more relieved with the clarity of sanctions against Russia. President Joe Biden on Thursday announced a new round of sanctions after the invasion.
“The fact that they specifically excluded energy and agriculture [in the new sanctions] Kleintop says the spillover to the global economy is very limited.
The impact on global gross domestic product is likely to be small, as both Russia and Ukraine together account for about 2% of GDP based on global markets, Goldman Sachs economists say.
By contrast, spillovers through commodity markets (Russia produces 11% and 17% of global oil and gas) and financial conditions could be slightly larger, the economists note.
Fed raises interest rates
Schwab’s Kleintop said he expects the stock market to stay flat after the Fed’s first rate hike, expected at the March meeting.
“We are in a downtrend,” he said. The market is concerned about the valuation. As the focus shifts away from Ukraine, “I think we’re going to settle back into a tougher, more volatile environment, but concerns that this is a major break completely change the landscape for Probably not.”
Caron said investors are looking for clarity on whether the Ukraine situation could prompt the Fed to slow down its rate hikes in 2022.
One big question remains whether the Fed can raise rates by 50 basis points on March 16 to initiate its first rate hike since 2018. One basis point equals 0.01%.
“I think the situation in Ukraine is less likely to see them rise by 50 basis points this time around,” said PNC chief economist Gus Faucher, noting that the Fed will continue to maintain a path forward. stabilize and review the situation. move to go hiking.
However, traders will also be looking for clues as to how the central bank can reduce its balance sheet by nearly $9 trillion.
Caron said many investors expect the Fed to begin reducing its holdings of Treasuries and mortgage-backed securities in June or July.
“It’s really about liquidity in the market. What we’re really trying to gauge is whether this Russia-Ukraine creates systemic risk,” he said. Reducing balance sheet size is about removing liquidity from the financial system.
Caron added that the stock market has eased confidence that the Fed will not move as quickly as some expect because of the Ukraine conflict. “People believe rates are going to be higher, but not uncomfortably higher so all growth stocks are doing better in this environment,” he said.
He also said the February jobs report was important but it would not change the Fed’s course.
Jobs, jobs, jobs
In January, 467,000 salary has been addedand revisions announced in early February put recent job growth at around 500,000.
Swonk said she expects an additional 400,000 jobs in February.
“We know that February vacancies picked up after a lull in the omicron wave and that should also show up with more jobs in February. … We’ve seen that too. strong increase for spring break,” said the economist, noting that she expects more jobs in the leisure and hospitality sectors as well as gains in everything from manufacturing to Export to professional business services.
Boiling oil
Oil prices will likely remain volatile with some strategists expect continued profits. OPEC+ holds its monthly meeting on Wednesday. Oil fell on Fridayas speculation grows that Iran could soon reach a deal on its nuclear program that would allow it to return to the market by 1 million barrels.
“That’s why you’ve seen the market react the way it is,” said John Kilduff of Again Capital. “There’s a decent amount of oil.”
West Texas Intermediate crude futures were down 1% on Friday at $91.86 a barrel.
Bet increased?
Some strategists expect the market the bottom may have been set when it rebounded on Thursday higher.
But one investor seems to be betting big on a bullish move in the market.
“We have an investor who just made a very bullish bet on the S&P 500, over the last three days. He doubled his bet today that it’s going to be higher,” said Cardinal founder. Capital Pat Kernan said on Friday.
Kernan, who works on the Cboe S&P 500 options team, said the transaction was a “real money” bet of more than $200 million.
The investor bought 65,000 call spreads expiring every Friday from March 4 to March 25. The biggest bet was 30,000 call spreads that expired on March 18, right after the call. Fed meeting.
The breakeven price indicates that investors believe the S&P 500 will be at least as high as 4,460 by then.
The market changed radically on Friday, Kernan said, and it was very different earlier in the week.
“It’s insanely terrifying,” he said of S&P futures.
Week-by-week calendar
Monday
Income: Working day, Ambarella, Nielsen, Pho play, Tegna, Lordstown Motor, Viatris, Endo, oneok, Enlarge Video, Vroom, Novavax, Lucid Group, MBIA
8:30 a.m. Previous economic indicators
9:45 am Chicago PMI
10:30 a.m. Atlanta Fed President Raphael Bostic
Tuesday
Monthly car sales
Income: Salesforce.com, Target, Hewlett Packard Enterprises, NordstromBaidu, Hormel Food, international game technology, AutoZone, JM Smucker, Domino’s Pizza, Hovnanian, Kohl’s, Wendy’s, WW international, Brand Attendant, Ross Store, urban dressers, AMC Entertainment
9:45 am Manufacturing PMI
10:00 am ISM Manufacturing
10:00 am Construction spending
2:00pm at Atlanta Fed’s Bostic
Wednesday
Income: American Eagle Outfitters, Boxes, Pure Storage, Abercrombie and Fitch, Dollar Tree, Just Eat Takeaway, ChargePoint, Victoria’s Secret, Snowflakes, Food and drink brand
8:15 am ADP jobs
9:00 a.m. Chicago Fed President Charles Evans
10:00 a.m. Fed Chairman Jerome Powell testifies semiannually at the House Financial Services Committee
2:00pm Beige Book
Thursday
Income: wholesale costco, Marvell Tech, Smith and Wesson, Cooper Cos, Toronto-Dominion Bank, Big Lots, Wholesale of BJ, Burlington Store, Kroger, Broadcom, Vizio, Sweetgreen
8:30 a.m. Initial Jobless Claims
8:30 a.m. Productivity and costs
9:45 am Services PMI
10:00 am ISM Service
10:00 am Factory order
10:00 a.m. Fed Chair Powell testifies semiannually at the Senate Banking Committee
6:00 p.m. New York Fed President John Williams
Friday
8:30 a.m. Job Report
