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

The Federal Reserve could remain a source of fear for the markets over the next week, with Chairman Jerome Powell scheduled to testify twice before Congress and more than a dozen other Fed speeches are expected.

The bond market’s response to the central bank last week has been extremely volatile.

While the market was initially stable after the two-day Fed meeting and Powell’s briefing Wednesday, Thursday saw a major bond sell-off and rising interest rates. Traders responded to the central bank’s willingness to warm up inflation and the economy while the labor market recovers.

Over the next week, bond market professionals will be watching Powell and another member of the Fed for further clues.

“These are bonds – I wouldn’t call it a day in the sun – it’s more like a day in the tornado,” said Michael Schumacher, Wells Fargo’s chief interest rate strategy. “Obviously, the bond market is the market the stock market is looking at right now, and normally that’s not the case.”

Inventories were lower this week, with a Dow of about 0.5% and the S&P 500 down 0.7%. The Nasdaq Composite was down 0.8% this week.

However, the Russell 2000 was hit the hardest, losing nearly 3% this week.

Revenues skyrocketed as the market sold out. Bond yields move inversely with price.

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

“The bond movement has been huge and it’s starting to scare people,” said Schumacher.

“There has been a question for a while: How much of an increase in yield can some of the higher octane stocks tolerate?” he asked. “There’s no magic number, but right now the 10th anniversary is up 80 basis points this year. It’s unbelievable.”

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

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

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

There are also some important data.

Key releases include Friday’s personal consumption and spending data, including the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation was 1.5% year on year in January.

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

The majority of Fed officials did not see any rate hikes until 2023.

Powell reiterated that the Fed sees only a temporary rebound in inflation this year due to the base effects versus last year’s numbers when prices fell.

The central bank is aiming for an average inflation rate of around 2%, so that number can cross the threshold for some time. It is a change to the Fed’s ground rules that is making the bond market nervous.

Normally, the Fed would raise interest rates if inflation flared up to avoid overheating the economy and avert a crisis.

“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 consensus on what those numbers and crash barriers mean, it will be difficult,” she said. “They will interpret themselves as economists, and they will speak a different language from the bond market.”

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

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

“The market is trying to understand what could be seen as a division between their economic projections and the Fed’s dual mandate of unemployment and inflation,” said Grohowski.

“Still, they are committed to holding short interest rates until the end of 2023,” he said. “That’s what the market is struggling with. I find it disturbing for me to hear words like ‘overshoot’.”

Grohowski expects what he calls the “great rotation” from technology and growth stocks to cyclical stocks and value will continue. Growth and technology have been the most sensitive to rising interest rates, and the Nasdaq has corrected more than 10%.

“I think we’re in the sixth or seventh inning of a nine-inning game. It’s not over yet, but I think we’ve seen the lion’s share of the big rotation disappear from growth, in value,” said Grohowski. He said that opinion depends on the fact that the 10-year doesn’t get much above 1.75%.

Grohowski is concerned about the Fed’s willingness to let inflation overshoot, as inflation is negative for stocks.

Supply chain issues are a concern. He pointed to Nike’s comments on Thursday that sales were hurt by port congestion, as well as the shortage of semiconductors, which is affecting car production.

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

He said the market is struggling to reconcile the lack of forecast rate hikes with the strength of the Fed’s economic forecast.

‘If you ask me why I’m losing sleep? … It’s too much of a good thing. Too much of a good thing is to be accommodative, ”said Grohowski.

Schumacher said there is a chance the bond market will remain stable in the coming weeks, even if interest rates rise.

He said corporate pension funds are likely to rearrange capital into bonds before the end of the March 31 quarter, and that could be supportive. Also, as the Japanese fiscal year kicks off, new purchases in US Treasuries could also be made, as US debt looks very cheap on a currency-adjusted basis, Schumacher said.

He will also be watching the Treasury auctions over the next week.

The Treasury Auctions $ 60 Billion Two-Year Notes Tuesday; $ 61 billion five-year notes Wednesday, and $ 62 billion seven-year notes Thursday.

Schumacher looks particularly at the 7-year auction, which drew poor demand last month.

Monday

Merits: Tencent Music Entertainment

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

10:00 am Existing home sales

10:00 am Quarterly financial report

1:00 p.m. San Francisco Fed President Mary Daly

1:30 pm Fed Deputy Chairman Randal Quarles

7:15 pm Fed Governor Michelle Bowman

Tuesday

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

8.30 am Payment account

9:00 am St. Louis Fed President James Bullard

10.00 am Sale of new homes

12 noon Fed Chairman Powell, Treasury Secretary Janet Yellen at House Financial Services Committee

1:00 p.m. Treasury auctions $ 60 billion 2-year notes

1:25 pm Fed Governor Lael Brainard

1:45 pm New York Fed President John Williams

3:45 pm Fed Governor Brainard

4:20 pm St. Louis Fed’s Bullard

Wednesday

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

8:30 am Durable goods

9.45 am Production PMI

9:45 am Services PMI

10:00 am Fed Chairman Powell, Chancellor of the Exchequer Yellen at Senate Banking Committee

1:00 p.m. Treasury auctions $ 61 billion 5-year notes

1:35 pm Williams of the New York Fed

3:00 pm San Francisco Fed’s Daly

7:00 PM, Chicago Fed President Charles Evans

Thursday

Merits: Darden Restaurants

5:30 am Williams of the New York Fed

8:30 am Initial claims

8.30 am Q4 GDP third reading

10:10 am Fed Vice Chairman Richard Clarida

10:30 a.m. Williams of the New York Fed

1:00 p.m. Treasury auctions $ 62 billion 7-year notes

1:00 p.m. Evans of the Chicago Fed

7:00 pm San Francisco Fed’s Daly

Friday

8.30 am Personal income / expenses

8.30 am Preliminary economic indicators

10:00 am Consumer feeling