Markets are expected to continue to be competitive when the Fed meets next week

news7g01/21/2022

10 5 minutes read

Markets are expected to continue to be competitive when the Fed meets next week

Traders on the NYSE, January 13, 2022.

Source: NYSE

The market turmoil is likely to continue next week when the Federal Reserve meets and the biggest tech organizations — Apple and Microsoft — report earnings.

Stocks on Friday ended their worst week in months, with big losses in tech and consumer discretionary names. FANG I love Netflix broke after earnings on Thursday afternoon and traders are watching to see if a similar fate befalls other big tech names.

The Federal Reserve meeting on Tuesday and Wednesday trumps everything else for markets, as investors await any fresh clues as to how much the central bank will raise interest rates. this year and when it starts. Economists expect the Fed to steer markets towards a March rate hike by a quarter of a percentage point.

There’s also a flood of major earnings reports expected, including nearly half of the Dow 30’s blue chips, such as 3M, IBM, Intel, Caterpillar and American Express. The two largest stocks by market capitalization, Microsoft and Apple, reported Tuesday and Thursday respectively.

The economy will also be in focus with a first look at fourth-quarter GDP on Thursday and personal consumption spending data on Friday, including the Fed’s preferred measure of inflation.

Stocks could enter into more volatile trading, after a week of seers that led to a massive drop in major indexes.

Nasdaq lost more than 5.7% for the week on Friday afternoon, its worst weekly loss since October 2020. The most important sectors for the week were consumer discretionary, down about 7%; financials down 5.6% and technology down 5.5%.

So far, earnings season has been mixed with some high-profile stock reactions as investors don’t like what they hear.

Netflix stock appreciates after discussing disappointing subscriber data Thursday, and JP Morgan Chase fell sharply a week ago reporting higher costs and slower trading activity.

“We don’t think earnings season is the macro catalyst to move the indexes significantly in this direction or direction,” said Julian Emanuel, Head of Equity, Derivatives and Quantitative Strategist at Evercore ISI. This is the story of each stock.” .

“Good reports are likely to be rewarded but in a much more muted fashion, while companies miss either [revenues or earnings] will be punished disproportionately. It doesn’t matter if you beat or miss, but if you comment negatively on profits and costs, you will pay the price,” he added.

Similar inflation is showing at the expense of rising corporate earnings and higher prices have become a major concern for the Fed. Investors will be listening closely to hear how worried the Fed is about inflation when the Chairman Jerome Powell media briefing Wednesday afternoon after the Federal Open Market Committee policymaking released its statement.

The Fed is not expected to raise interest rates or change policy at this meeting, but it could set the stage for how the Fed will operate at the end of its bond-buying program, possibly in March. Many economists expect the Fed could start raising its lending rate target from near zero with a quarter percentage point increase in March.

“The baseline is that we see four increases and start quantitative tightening around mid to late year,” said Emanuel. “I don’t think the Fed will do anything to get the market out of that stance.”

The Fed has also said that they can move to shrink its balance sheet This year, and it will be another type of policy tightening, as the central bank steps back from replacing maturing securities on its balance with market purchases. In essence, that will begin to reduce the size of balance sheet close to 9 trillion dollars.

The Fed has sounded much more hawkish, or supportive of rate hikes and other tightening policies, especially since releasing its forecast in December. Powell is unlikely to change his tone in the matter. this week, even with stocks sell off, said Emanuel.

“If Powell is going to sound dovish, that assumption would be a positive for the market, but we could argue that won’t happen,” he said. “If the market doesn’t really believe he’s going with the quadruple plan, it’s very likely that the 10-year yield has broken out of the three-year range by rising more than 1.80%, which could quickly move to 2%.”

“Growth has gone against value,” he added. That would destabilize the market.

The Fed has been seen as behind the curve by some Fed watchers.

“The Fed has never been slow to react to emerging inflation risks and even today is signaling a bullish cycle,” said Ethan Harris, head of global economic research at Bank of America. healthy prices”. “If they’re wrong, and inflation settles to closer to 3% than 2%, that’s bad news for both stocks and bonds.”

Bond yields stagnated

Bond yields continued to be one notch higher at the start of last week but fell back again at the end of the week. Widely tracked benchmarks 10-year Treasury yield touched 1.9% midweek before falling back to 1.75% on Friday.

Ian Lyngen, BMO, head of US interest rate strategy, said the bond market is pricing in as lending rates rise to 1.75%. He said the Fed will have to show it can push the fund target higher to reach 2% in 10 years.

“We expect it to consolidate in this range through Wednesday,” Lyngen said. “If the Fed doesn’t get more hawkish, we’ll see the classic ‘buy the rumour, sell the truth’ and 10-year yields go down.” Yields move inversely to price.

Tech and growth stocks were hit the hardest by the rate hike. Those stocks are priced based on their prospects for future returns, and assuming a low-money environment, valuations could be higher.

But as the Fed tightens and inflation continues to flare, many strategists expect cyclical and value stocks to outperform. Since the beginning of the year, the technology sector has decreased by nearly 10%. Energy was superior, and was the only major sector higher this year, up 13.5%.

“The whole Fed’s intention on this is to tighten financial conditions, in a way, if you’re the Fed, what you’ve seen in the first three weeks of the year, you’re probably perfectly fine.” , said Emanuel. “I don’t think if you were Powell, you’d be trying to get the market out of its current mode. I think you’d be pretty happy with how the year started.”

Emanuel expects the S&P 500 to end the year at 5,100. As for the current sell-off, he said the S&P 500 is likely to hit the 200-day moving average at around 4,425, but there is no guarantee that will be the bottom of this sell-off.