Federal Reserve Chairman Jerome Powell, wearing a face mask, testified before the House Financial Services Committee during a hearing on the oversight of the Treasury Department and the response of the Federal Reserve to the Capitol Outbreak (COVID-19). Hill in Washington, DC, USA, June 30, 2020
Thassos Catopodis Reuters
Markets are looking to the Federal Reserve to be a reassuring force when it comes together next week, but stocks could remain torn if the central bank disappoints and as investors focus on elections and economic recovery.
Quincy Crosby, chief investment strategist at Prudential Financial, said the stock market could easily be disappointed as the Fed is unlikely to offer more clarity on monetary policy, such as bond-buying plans.
“The market is concerned that the Fed will not give us explicit testimony about their monetary policy plans,” she said. The Fed’s emergency policies are an important factor in the 50 percent jump in the stock market from the March 23 low, and it is also seen as a major factor limiting the depth of the market sell-off.
Peter Bukvar, chief investment officer at Bleakley Advisory Group, said the Fed was unlikely to change much and continued to buy $ 80 billion a month at Treasurys. “I don’t think they will do anything in the markets one way or another,” he said.
Shares have been volatile over the past week, falling sharply, coming together, falling and reuniting. This left the S&P 500 with a weekly decline of about 2.5%, the worst week since June. The most affected Nasdaq fell about 4.1% for the week, its worst weekly decline since March. The quadruple expiration of options and futures at the end of next week may increase volatility.
Bank of America strategists said the bond market was following the Fed’s balance sheet adjustments and changes in its forward guidelines, which included the Fed’s recent tweak in its inflation policy. The Fed has changed its policy of focusing on the inflation target to an average rate, which means it may not tighten policy if inflation exceeds its 2% target.
“We see a risk that the interest rate market is overwhelmed by guidelines provided by the Fed that would support higher interest rates and a steeper curve,” Bank of America strategists said. The reference 10-year Treasury yield has slipped in the past week, hitting 0.67% on Friday, and could move up, meaning the bonds could sell out if the Fed doesn’t clarify its buy-in policy. bonds.
Crosby said the stock market was hoping for a stupid Fed. “The market needs this now because fiscal policy is going nowhere,” she said.
BTIG strategist Julian Emanuel said the market could focus on the fact that Congress has failed to make progress on fiscal stimulus if economic data begins to disappoint.
Retail sales for August are expected Wednesday morning as the Fed meets. They are expected to increase by 1%, and this should be an important look at whether the lack of increased unemployment benefits, which expired on 31 July, has affected consumer spending. Among other things, Republicans and Democrats could not agree on how to replace the 600 weekly unemployment benefits.
“Depending on surveys and economic data, the likelihood of an incentive increases and decreases,” said Emanuel, head of equity and derivatives strategy.
“Our view is that next week will simply be a long way back and forth with the potential to further expand the scope for the minuses if the political narrative flares up even more,” Emanuel said. Emanuel expects the market to remain volatile and fall as early as October as investors worry about uncertainty over the presidential election.
The Fed’s meeting this week is the last before the election, and analysts expect Fed Chairman Jerome Powell to sound reassuring that the Fed will do whatever it takes to support the economy. Powell is holding a briefing after Wednesday’s meeting and is expected to be asked about the potential for higher inflation. The Fed said it was more concerned about disinflation, but the latest inflation figures were hotter than expected, although they were still well below 2%.
“There are weapons among those who say they are buying chips now because inflation is rising, compared to those who say deflationary forces are still making their way to the economy,” Crosby said.
Mark Chandler, chief market strategist at Bannockburn Global Forex, said he expects the Fed to sound reassuring, but is unlikely to discuss a bond-buying target or yield curve control that some investors are hoping for. Controlling the yield curve would mean that the Fed would try to manage interest rates by targeting its purchases on specific government securities. For example, he may focus on trying to keep lower yields lower and buy the 10-year-old.
Chandler also noted that the Fed’s $ 7 trillion balance sheet has recently fallen by about $ 100 billion from its peak, and bond purchases are lagging behind the European Central Bank.
“I think the Fed will keep repeating that it is not worried about inflation. Its bigger concern is the declining risks. They will repeat their call for fiscal stimulus, which seems less likely this week,” he said.
Chandler said the stock market could remain volatile next week, but did not expect a sharp sell-off. The dollar could fall if the Fed sounds silly and that’s positive for stocks.
“I do not think there will be a 10% retreat [in Nasdaq] has caused enough pain to capitulate people. It’s just a simple adjustment and we will make new peaks, “he said.
Week ahead calendar
The FOMC meeting begins
8:30 h. Import prices
8:30 a.m. Production by Empire State
9:15 am Industrial production
8:30 am Retail sales
8:30 am Survey of business leaders
10:00 a.m. NAHB study
10:00 am Business inventory
14:00 Decision of the Fed
2:30 pm Briefing of Fed Chairman Jerome Powell
16:00 TIC data
8:30 am Claims for the unemployed
8:30 a.m. The apartment begins
8:30 a.m. Study of the Philadelphia Fed
8:30 am Current account
10:00 h. Consumer sentiment
10:00 a.m. St. Louis Fed President James Bullard