Federal Reserve Chairman Jerome Powell speaks at a news conference following a meeting of the Federal Open Market Committee May 4, 2022 in Washington, DC. Powell announced that the Federal Reserve is raising interest rates by half a percentage point to fight record-high inflation.
Win Mcnamee | Getty Images
The coming week could boil down to what Federal Reserve Chair Jerome Powell has to say at 2:30 p.m. Wednesday afternoon.
Powell briefs the press after the Fed’s two-day meeting. The Fed is widely expected to raise its interest rate range for Fed funds by half a percentage point, but the hot May inflation data has made markets jittery as to whether the Fed could be even more aggressive or forecast a faster pace of future rate hikes.
The Fed will release new economic and rate forecasts at 2pm ET. But it’s anything Powell says about rate hikes over the summer and fall that could help set the stage for turbulent financial markets. Stocks and bonds were volatile as investors feared inflation might not peak and the Fed’s rate hikes could trigger a recession.
“I really think the most important thing is what Powell is talking about at the conference and if he’s giving anything that sounds like a solid forecast for September,” said Michael Schumacher, Wells Fargo’s head of macro strategy. “If he does, he would only do it if he were hawkish, and if he doesn’t, people will see it as reticent.”
Schumacher said Wednesday’s Fed fund futures market reflected a 56 basis point hike. One basis point corresponds to 0.01 percentage points.
Stocks plummeted after Friday’s much hotter than expected May CPI. For the week, the S&P 500 was down 4.5% late Friday afternoon.
“The market wants clear and compelling evidence that the Fed can pull this off without triggering a recession,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets. She said the market will follow the economic data. “Maybe you’re stuck in purgatory for a while.”
Friday’s inflation report was a negative catalyst for markets which were already pricing in concerns over hot inflation and fears of recession. The CPI rose 8.6% year over year, well above the 8.3% expected by economists polled by Dow Jones.
This has also fueled debate over whether the Fed will consider a 75 basis point rate hike and proceed with a more aggressive pace of rate hikes. Both Barclays and Jefferies revised their forecasts on Friday, including a 75 basis point hike for next Wednesday, although other economists still expect half a point.
Goldman Sachs economists on Friday revised their forecast to reflect a half-point hike in September, in addition to a half-point hike on Wednesday and another in July.
JP Morgan economists expect Fed officials to release fresh rate forecasts that reflect a faster pace of monetary tightening, but they still see a half-point hike on Wednesday. They expect the Fed’s median forecast for interest rates to show the federal funds rate at 2.625% by the end of the year, well above a March forecast of 1.875%.
“Chair Powell has expressed a desire to manage rather than surprise expectations. With little apparent appetite for an upside surprise, price appears set for a 50 basis point hike next week,” noted JP Morgan economists.
RBC’s Calvasina said she was waiting for Powell’s comments and didn’t expect any surprises from the meeting. She said she’s encouraged that some Fed officials seem willing to hike rates faster earlier in the year and allow for flexibility later.
“I think markets like that. It shows they’re not on autopilot,” she said. “It shows that they don’t want to do too much damage to the economy. I would love to hear more comments on this flexibility.”
Aside from the Fed, there are some key economic reports on the calendar next week, including Tuesday’s PPI; retail sales Wednesday; Housing construction starts on Thursday and industrial production on Friday. All four reports cover May.
There’s only a handful of earnings, including Oracle on Monday.
recession warning?
In the bond market, Treasury yields rose after the hotter inflation report, but the yield curve also flattened. This means that shorter-duration yields, like the 2-year, have risen closer to longer-duration yields, like the 10-year.
On Friday, the 2-year Treasury yield hit 3.05% and the spread was just 10 basis points. If the 2-year yield moved above the 10-year yield, the curve would invert, signaling a recession.
Calvasina said the stock market is pricing in only a mild recession for now. The S&P 500 has fallen an average of 32% in more traditional recessions, and it’s down almost 20% this cycle.
The strategist said there is a 60 percent chance that the market has already bottomed. “I think the ratings have gotten reasonable enough that you can go to your shopping list and buy the names that you wanted to buy,” she said.
The Fed remains a challenge for equity investors, but small caps could be an area that’s been battered enough.
“I think there’s a bit of a thirst and a bit of a hunger out there to chase valuation opportunities, and I think small caps are looking as good as anything,” she said.
Calendar of the week ahead
Monday
Merits: oracle
Tuesday
FOMC begins two-day session
6:00 a.m. NFIB Small Business Survey
8:30 a.m. PPI
Wednesday
Merits: John Wiley
8:30 a.m. Retail sale
8:30 a.m. Import prices
8:30 a.m. Empire State Manufacturing
10:00 a.m. Company inventory
10:00 a.m. NAHB home builder survey
14:00 Fed statement and forecasts
2:30 p.m. Fed Chair Jerome Powell briefs media
4:00 p.m. TIC data
Thursday
Merits: Adobe, Kroger, Commercial Metals, Jabil
8:30 am First claims
8:30 a.m. Living begins
8:30 Philadelphia Fed production
8:30 am Survey of Business Leaders
Friday
8:45 am Fed Chair Jerome Powell welcomes remarks at conference on US dollar’s international role
9:15 a.m. Industrial production
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