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

Federal Reserve Chairman Jerome Powell is listening during a hearing on the Senate Banking Committee on ‘The Quarterly CARES Act Report to Congress’ at Capitol Hill in Washington, USA, December 1, 2020.

Susan Walsh | Reuters

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, on Thursday a large sales of bonds and rising rates came. 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. “It’s clear that the bond market is the market that the stock market is currently watching, and that’s not usually the case.”

Shares were lower during the week, with the Dow up 0.5% and the S&P 500 up 0.7%. The Nasdaq Composite 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 more 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 speaks

Inflation and the Fed

“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 break 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’.”

Rotation of technology in cycles

Direction on the bond market

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 the Japanese fiscal year begins, new purchases could also take place in U.S. treasuries because U.S. debt looks very cheap, Schumacher said.

He is also watching treasury auctions next week.

The 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.

Week calendar in advance

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

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