Four coming events that will make or break this year’s rally
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Bloomberg News
Jessica Menton and Elena Popina
Published Mar 05, 2023 • Last updated 11 hours ago • 4 minute read
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Traders will be monitoring four major events in the next 13 trading sessions. Photo by REUTERS/Brendan McDermid Four major events over the next 13 trading sessions will be the key catalysts in determining whether this year’s stock-market revival gets derailed or starts rolling again after a February slump.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors It all begins Tuesday, when United States Federal Reserve chair Jerome Powell delivers his two-day biannual monetary policy testimony on Capitol Hill. With the S&P 500 index coming off its best week in a month, investors will be searching for any hint on the central bank’s interest rate hiking path.
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“The market is clinging to every single positive thing Powell says,” Emily Hill, founding partner at Bowersock Capital Partners, said. “The minute the word ‘disinflation’ left his lips in a speech earlier this year, the market soared.”
Indeed, the rally at the end of last week was spurred by Federal Reserve Bank of Atlanta chief Raphael Bostic saying the central bank could pause this summer.
After Powell, comes the February jobs report on March 10 and the consumer price index (CPI) on March 14. Another hot reading on employment growth and inflation could dash any hopes that the Fed will pull back soon.
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Article content “There are such conflicting signals in the economy,” Hill said. “So you’re going to see overreactions from investors to the upcoming data.”
Then, on March 22, the Fed will give its policy decision and quarterly interest rate projections, and Powell will hold his press conference. After that, investors should have a pretty clear idea of whether the central bank will halt its rate hikes some time in the coming months.
Source: Citigroup Source: Citigroup Investors are anxious about most of this. Forward implied volatility is back in the low 30s for the CPI day and nearing 40 for the Fed’s rate-decision day later, meaning traders are betting on some big swings, data compiled by Citigroup Inc. show.
However, a forward implied volatility reading of 26 on jobs data day indicates the market is underpricing that risk, according to Stuart Kaiser, Citigroup’s head of U.S. equity trading strategy.
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Article content As for the stock market itself, the prevailing sense has been calm. The S&P 500 posted a daily move of less than 0.5 per cent in either direction for the three trading days ending March 1, a streak of tranquility last seen in January when investors boosted their bets that the U.S. economy may avert a recession as inflation ebbs.
Here’s what traders will be monitoring.
Powell Testimony The Fed chair’s biannual monetary policy report to the U.S. Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday are likely to offer hints on the U.S. economic outlook, specifically inflation, wage pressures and employment. Traders will also look for clues on additional steps the Fed will take to control elevated prices.
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Article content Jobs Report The labour market was strong in January. That’s an important driver of inflation, because wage growth can keep prices higher. And it’s a risk for stock prices because sticky inflation would prevent the Fed from pausing rate hikes.
Economists predict the February unemployment rate will come in at 3.4 per cent, unchanged from January. Nonfarm payrolls growth is expected to drop to 215,000 after a surprising burst of 517,000 jobs a month earlier. But, ultimately, the data comes down to wages and whether the Fed thinks they’re slowing fast enough to drive inflation lower.
Inflation Data The February consumer price index reading is crucial, after it jumped to start the year. Any sign of persistent inflation could push the Fed to raise rates even higher than already expected.
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Article content The forecast for February’s CPI is six per cent, an improvement from January’s 6.4 per cent. Core CPI, which strips out the volatile food and energy components and is seen as a better underlying indicator than the headline measure, is projected to rise 5.4 per cent from February 2022 and 0.4 per cent from a month earlier. The Fed’s inflation target, which takes in more than just the CPI reading, is two per cent.
Fed Decision The market is pricing in a September peak in interest rates at 5.4 per cent, nearly a percentage point above the current effective federal funds rate. Traders are preparing for the possibility of the Fed returning to jumbo rate hikes, with overnight index swaps pricing in about 31 basis points of tightening later this month.
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Article content 3 factors affecting our currency that will hurt Canadians for years to come Citi strategists say traders are piling up short bets on stocks Of course, the Fed’s forward expectations and Powell’s comments after the decision will affect market sentiment. But it’s about big misses, such as inflation readings coming in much hotter than expected, that would derail the stock market’s recovery attempts, according to Michael Antonelli, market strategist at Robert W. Baird & Co.
“If the terminal rate goes from five per cent to 5.5 per cent, that will be a headwind, but it won’t crater the stock market the way it did last year,” Antonelli said. “Last year, we didn’t know what the worse-case scenarios were going to look like, but this year the window of potential outcomes is much narrower. And investors like that.”
Bloomberg.com