Tag: federal reserve

The Week of The Fed

“I don’t stop when I’m tired, I stop when I’m done. ” -David Goggins

THE WEEK OF THE FED

Friday, March (3/19) Closing Price

TABLE OF CONTENTS
  1. Review of Past Week: News and events 3/15 -3/19
  2. Review of Past Week: Earnings 3/15 – 3/19
  3. Upcoming Week: Talks and events 
  4. Upcoming Week: Earnings from 3/22 – 3/26 
  5. Educational Learning Segment

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Jerome Powell Speaks and the Market goes Parabolic

Markets reacted exceptionally well to Jerome Powell’s press release on Wednesday afternoon, with the S&P500 climbing nearly .64%. Some of the highlights from his recap of the FOMC (Federal Open Market Committee).

  • Projecting GDP Growth of 6.4%
  • Unemployment down to 4.5% by the end of the year
  • Inflation is currently below 2% projections
  • Federal Funds Rate to remain at 0 – .25% in the near future
  • Continue purchasing Treasury Securities and Mortgage-Backed Securities
  • Household Spending on goods is strong
  • Household Spending on services is weak

Let’s Break This Down

First and foremost, a GDP projection of 6.4% is an extremely healthy sign of a roaring back economy in 2021. In the last 50 years, the United States has reached a GDP growth rate of over 6% three times. This growth rate would mark an extraordinary bounce-back of the economy within the next 6-10 months. This is primarily due to vaccinations and herd immunity. Additionally, Powell highlighted a lower unemployment rate heading into 2022 as another indicator of a stronger economy. He did highlight that this figure may be slightly lower due to some individuals not participating in the labor market. He made sure to reiterate the position that inflation is well below their 2% projections for this year, and moving forward, we can begin to see it rise due to March and April data from 2020 leaving the picture.

When those two months are out of the data, we will see a “transitory” spike in inflation to around 2.4%. These remarks sent the 10-Year Treasury Yield on Thursday to a new 52-Week high of 1.75%, which subsequently took away all of the market gains from the day before. Most notably, in his speech, Powell remained steadfast on Interest Rates remaining at near 0%. He wants to wait “for actual data and not forecasts” to indicate that Inflation is above their 2% target for an extended period before raising rates. Lastly, Powell noted that supply might be bottlenecked for the next year with production not keeping up with such increased demand.


The Fed Declined to Extend Bank Lower Capital Requirements

One Friday, banks, including Chase, Citi Bank, Wells Fargo, and Goldman Sachs all took a dip after the Fed declined to extend a pandemic-era exemption that allowed them lowered capital requirements.

The brieftly stated that they will allow the exempation to expire on March 31st that has been in place since April of last year.

The decision to relax the capital requirements has been widely viewed as key to calming what had been tumultuous Treasury markets in the early days of the Covid-19 pandemic. A need for cash had caused a massive sell-off in the bond market that the Fed helped to cover through its liquidity programs.

“The Board will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements,” the Fed said in a statement.

Bank stocks were sharply lower following the announcement, pulling down the broader market, but government bond yields were mixed.


Earnings Recap 3/15 – 2/19

Retail Therapy is Still As Active As Ever

On Friday, Fedex’s trading price increased over 6% after having better than expected earnings. On top of additional spending by consumers, FedEx is one of the leading logistics companies in the effort to deliver Covid-19 Vaccines across the globe. Operating Income increased primarily due to the increase of domestic spending by consumers. With household spending on goods remaining strong in the near future, FedEx will continue to have excellent earnings. FedEx is continually partnering with online retailers to be their logistics provider, and this will continue to increase revenue.

Some takeaways, while FedEx may have astronomical numbers, they are inflated due to Covid-19. Individuals, businesses, and families are all remaining home and using online shopping as a convenient way to get things. We can see FedEx’s earnings slowly normalize in the next few quarters  due to more in-person shopping and normalcy.

UPCOMING WEEK 3/22 – 3/26

EVENTS & TALKS
UPCOMING WEEK’S EARNINGS 3/22 – 3/26
EDUCATIONAL LEARNING SEGMENT
Is Buying the Dip Dead?

The Fed, the source of market volatility or an ally ?

The Fed could be a source of market volatility as Powell and others speak in the week ahead.

 

  • Fed Chairman Jerome Powell testifies before Congress twice this week, and a dozen other Fed speeches are slated for next week.
  • Personal consumption expenditures inflation data will be released at the end of the week.
  • It’s important as the market is focused on inflation and contending with the Fed’s willingness to let it run.
  • The direction of bond yields could continue to drive stocks after the 10-year reached a high of 1.75% this past week, its highest in 14 months.

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The Federal Reserve could remain a source of angst for markets in the week ahead, with chairman Jerome Powell scheduled to testify twice before Congress and more than a dozen other Fed speeches expected.

The bond market’s reaction to the central bank this past week was pretty volatile, as we would expect.

Though the market was initially steady after the two-day Fed meeting and Powell’s briefing Wednesday, Thursday came with a big selloff in bonds and spiking rates. Traders reacted to the fact that the central bank is willing to let inflation and the economy run hot while the job market recovers.

In the approaching week, bond market professionals will be watching Powell and other Fed members for further cues for what will come in the upcoming weeks.

“This is bonds’ — I wouldn’t call it a day in the sun — it’s more like a day in the tornado,” said Michael Schumacher, head of rate strategy at Wells Fargo. “Clearly, the bond market is the one the equity market is watching right now, and normally that’s not the case.”

Stocks were lower on the week, with the Dow off about 0.5% and the S&P 500 down 0.7%. The Nasdaq Composite was off 0.8% for the week.

 

Powell speaks

Powell testifies Tuesday and Wednesday before Congressional committees and Treasury Secretary Janet Yellen on Covid relief efforts and the economy.

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

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

Inflation and the Fed

There are also some key data.

Important releases include the personal consumption and expenditure data on Friday, including the PCE deflator, the Fed’s preferred inflation measure. Core PCE inflation was running at an annual pace of 1.5% in January.

The Federal Reserve this past week took no action at its two-day meeting, but it did present new economic projections, including a forecast of 6.5% for the gross domestic

product this year. The central bank’s forecast now shows PCE inflation going to 2.4% this year but falling to 2% next year.

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

“They will be trying to clarify the Fed’s message, but without a consensus on what those numbers and guardrails mean, it will be hard,” she said. “They will be explaining themselves as economists, and they’ll be speaking a different language than the bond market speaks.”

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

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

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

“Yet, they’re committed to keeping short rates on hold until the end of 2023,” he said. “That’s what the market is struggling with. I think it’s unsettling to me to hear words like ‘overshoot.’”

Rotation from tech into cyclical

Growth and tech have been most sensitive to rising rates, and the Nasdaq has corrected more than 10%.

 

Grohowski is concerned by the Fed’s willingness to let inflation overshoot because inflation is a negative for stocks.

Supply chain issues are a concern. He pointed to Nike’s comments Thursday that its sales were hurt by port congestion and the shortage of semiconductors, impacting automobile production.

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

He said the market is having difficulty reconciling the lack of any forecasted interest rate hikes versus the Fed’s economic forecast strength.

 

“If you ask me what I lose sleepover? …It’s too much of a good thing. Too much of a good thing is being too accommodative,” Grohowski said.