The Fed could be a source of volatility as Powell speaks next week

The Federal Reserve may continue to be a source of distress for the markets next week, with President Jerome Powell scheduled to testify before Congress and more than a dozen other Fed speeches are expected.

The bond market’s reaction to the central bank last week was exceptionally volatile.

Although the market was initially stable after the two-day Fed meeting and Powell’s briefing on Wednesday, Thursday came with a big sale of bonds and peak rates. Traders reacted to the fact that the central bank is willing to let inflation and the economy warm up while the labor market recovers.

Next week, bond traders will be looking to Powell and another Fed member looking for more leads.

“This is bonds’ – I wouldn’t say it’s day in the sun – it’s more like day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly, the bond market is the one that the stock market is looking at now, and that is usually not the case.”

Shares fell on the week, with the Dow down about 0.5% and the S&P 500, down 0.7%. The Nasdaq Composite fell 0.8% for the week.

Russell 2000, however, was the hardest hit, losing about 3% in the week.

Yields increased with market liquidation. Bond yields move inversely to price.

The 10-year reference Treasury yield, which impacts mortgages and other loans, rose to 1.75% on Thursday, a move of more than 10 basis points in less than a day. It was 1.72% on Friday afternoon.

“The movement of the titles has been huge and is starting to scare people,” said Schumacher.

“This question has been hanging around for some time: how much of an increase in yield can some of the higher octane stocks handle?” he asked. “There is no magic number, but as we speak, the 10-year figure is 80 basis points this year. It’s incredible.”

Powell testifies Tuesday and Wednesday to Congressional committees, along with Treasury Secretary Janet Yellen, about Covid’s relief efforts and the economy.

He also talks about central bank innovation at a Bank for International Settlements event on Monday morning.

Other speakers at the central bank this week include Fed Vice President Richard Clarida, Vice President Randal Quarles, Fed Governor Lael Brainard and New York Fed President John Williams.

There are also some important data.

Important disclosures include personal consumption and spending data on Friday, which include the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation ran at an annual rate of 1.5% in January.

The Federal Reserve took no action last week at its two-day meeting, but presented new economic projections, including a 6.5% forecast for gross domestic product this year. The central bank’s forecast now shows PCE inflation going up to 2.4% this year, but dropping to 2% next year.

Most Fed officials saw no increase in interest rates until 2023.

Powell reiterated that the Fed sees only a temporary acceleration in inflation this year because of the base effects against last year’s figures, when prices fell.

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

The Fed would normally raise interest rates if inflation soared to avoid an overheating economy and a downward cycle.

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

“They will try to clarify the Fed’s message, but without a consensus on what these numbers and barriers mean, it will be difficult,” she said. “They will explain themselves as economists and will speak a language different from that of the bond market.”

Leo Grohowski, investment director at BNY Mellon Wealth Management, expects the bond market to be more volatile than stocks and that inflation will be problematic for both.

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

“The market is trying to understand what can be perceived as a disconnect between its economic projections and the Fed’s double mandate for unemployment and inflation,” said Grohowski.

“Still, they are committed to keeping interest rates low until the end of 2023,” he said. “This is what the market is fighting against. I find it disturbing for me to hear words like ‘overshoot’.”

Grohowski hopes that what he calls the ‘big turnover’ of technology stocks and growth for cyclical stocks and value will continue. Growth and technology have been the most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

“I think we are in the sixth or seventh inning of a nine-game game. It is not over yet, but I think we’ve seen most of the big turnaround of growth for value,” said Grohowski. He said that the vision depends on the 10 years not rising much above 1.75%.

Grohowski is concerned about the Fed’s willingness to let inflation soar because inflation is negative for stocks.

Supply chain problems are a concern. He pointed to Nike’s comments on Thursday that its sales were hampered by port congestion and also by a shortage of semiconductors, which is affecting car production.

“Inflation expectations are problematic for P / E [price-earnings] proportions, “said Grohowski. [stock] the market is trading at 22 times our estimate for this year’s earnings. “

He said the market is having a hard time reconciling the lack of any expected increase in interest rates with the strength of the Fed’s economic forecasts.

“If you ask me why do I lose sleep? … It is too good. It is too good to be too accommodating,” said Grohowski.

Schumacher said there is a chance that the bond market will stabilize in the coming weeks, even if yields increase.

He said corporate pension funds appear likely to reallocate equity in bonds before the end of the quarter on March 31, which may be favorable. In addition, as the Japanese fiscal year is set to begin, there may also be new purchases of U.S. Treasury bills, because on a currency-adjusted basis the US debt looks very cheap, Schumacher said.

He also tracks Treasury auctions next week.

The Treasury is auctioning $ 60 billion in 2-year notes on Tuesday; $ 61 billion in 5-year notes on Wednesday and $ 62 billion in 7-year notes on Thursday.

In particular, Schumacher is looking at the 7-year auction, which attracted weak demand last month.

Monday

Earnings: Tencent Music Entertainment

9:00 am Fed Chairman Jerome Powell at the summit of the Bank for International Settlement

10 am Sales of existing homes

10:00 Quarterly Financial Report

1:00 pm San Francisco Fed President Mary Daly

1:30 pm Fed Vice President Randal Quarles

7:15 pm, Fed governor Michelle Bowman

Tuesday

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

8:30 am Current account

9:00 am St. Louis Fed Chairman James Bullard

10:00 Sale of new houses

12:00 pm Fed Powell Chairman, Treasury Secretary Janet Yellen on the Chamber’s Financial Services Committee

1:00 pm Treasury auctioned $ 60 billion in 2-year notes

1:25 pm Fed Governor Lael Brainard

1:45 pm New York Fed Chairman John Williams

15:45 Fed Governor Brainard

4:20 pm Bullard of the St. Louis Fed

Wednesday

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

8:30 am Durable goods

9:45 am manufacturing PMI

9:45 AM Service PMI

10:00 am Fed Powell President, Treasury Secretary Yellen on the Senate Banking Committee

1:00 pm Treasury auctions $ 61 billion in 5-year notes

1:35 pm Williams from New York Fed

3 pm San Francisco Fed’s Daly

7:00 pm Chicago Fed Chairman Charles Evans

Thursday

Earnings: Darden Restaurants

5:30 am Williams from the New York Fed

8:30 am Initial claims

8:30 am Third quarter GDP reading

10:10 am Fed Vice President Richard Clarida

10:30 am New York Fed Williams

1:00 pm Treasury auctions $ 62 billion in 7-year notes

1:00 pm Evans from Chicago Fed

7:00 pm Fed’s Daly San Francisco

Friday

8:30 am Personal income / expenses

8:30 am Advanced economic indicators

10:00 Consumer sentiment