Stocks Waver With Focus on Powell Amid Fedspeak: Markets Wrap

(Bloomberg) -- Stocks fluctuated, with traders waiting to see if Jerome Powell will join the chorus of Federal Reserve speakers throwing cold water on expectations for a central bank pivot this year.

As investors brace for the Fed Chair to push back on the dovish reaction to his recent rhetoric, Powell would need to be explicit about hiking beyond 5% — and not cutting rates in 2023 — to move markets meaningfully, noted Tom Essaye, founder of The Sevens Report. “We think the Fed chair will not lurch ‘max hawkish’, but will leverage the employment report to be more ‘credibly hawkish’,” said Evercore’s Krishna Guha. 

To Win Thin at Brown Brothers Harriman, it will be interesting to see if he tries to do any “damage control.”

“His press conference last week left a lot to be desired. In the wake of the strong data Friday, Powell may have to change his tone,” Thin added. “Indeed, the biggest surprise to us was that Powell did not push back against recent loosening of financial conditions. Will he course-correct or will he simply let the data do the talking for him? Stay tuned.”

In the run-up to Powell’s interview, Fed Bank of Minneapolis President Neel Kashkari said January’s strong labor-market report shows the US central bank would need to keep raising rates. “Right now I’m still at around 5.4%,” he told CNBC Tuesday, referring to his forecast for how high rates need to go to bridle inflation. The Fed raised its benchmark to a range of 4.5% to 4.75% last week.

Now one key thing here is that the big driver of the surge in stocks since mid-October has been the fact that bets on the Fed’s terminal rate have stabilized around 5%, according to Deutsche Bank’s Jim Reid.

“But if we see expectations of the terminal rate take another leg higher, then clearly that would knock out a key pillar of support from the recent rally.”

Traders will also keep a close eye on Joe Biden’s speech to a joint session of Congress on Tuesday evening in light of renewed tensions with China and a brewing showdown with House Republicans over raising the federal debt ceiling.

For investors worried that stock prices are going to be pummeled by shrinking corporate profits, here’s a little bit of good news: the drop so far seems largely priced in. 

With fourth-quarter results from more than half of the S&P 500 companies already in, earnings per share have fallen 2.8% from a year earlier, according to data compiled by Bloomberg Intelligence. That’s less than the 3.3% drop expected before earnings season began. The smaller-than-anticipated drop suggests that the profit contraction isn’t beginning as badly as once feared, lending support to share-price valuations.

“We continue to see broadening breadth and constructive price action to support further upside in equities,” said Craig Johnson at Piper Sandler. “Our short-term indicators suggest some areas may have rallied too much, too fast. However, we do not expect a significant reversal of the current YTD uptrend and view pullbacks and consolidations as buying opportunities.”

Still, as the Nasdaq 100 approaches a bull market and earnings estimates are trending down, valuations have swelled to expensive levels compared with real bond yields, posing a risk to the rally.

The tech-heavy benchmark’s forward price-to-earnings ratio has jumped to 24, the highest level since April, spurred by bets that inflation has peaked and the Fed will pivot soon. The move is at odds with the inflation-protected 10-year Treasury yield, which remains high on fears that a buoyant job market and stronger-than-expected economic data will keep the pressure on the Fed to stay hawkish. 

Read: NYSE Plans to Pay in Full Majority of Claims Tied to Glitch

Key events:

• US wholesale inventories, Wednesday
• New York Fed President John Williams is interviewed at Wall Street Journal live event, Wednesday
• US initial jobless claims, Thursday
• ECB President Christine Lagarde participates in EU leaders summit, Thursday
• Bank of England Governor Andrew Bailey appears before Treasury Committee, Thursday
• US University of Michigan consumer sentiment, Friday
• Fed’s Christopher Waller and Patrick Harker speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was unchanged as of 12:24 p.m. New York time
• The Nasdaq 100 rose 0.3%
• The Dow Jones Industrial Average fell 0.3%
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%
• The euro fell 0.2% to $1.0702
• The British pound was little changed at $1.2007
• The Japanese yen rose 1% to 131.33 per dollar

Cryptocurrencies

• Bitcoin was little changed at $22,926.3
• Ether fell 0.3% to $1,632.85

Bonds

• The yield on 10-year Treasuries advanced one basis point to 3.65%
• Germany’s 10-year yield advanced five basis points to 2.35%
• Britain’s 10-year yield advanced seven basis points to 3.32%

Commodities

• West Texas Intermediate crude rose 3.7% to $76.86 a barrel
• Gold futures rose 0.5% to $1,888.20 an ounce

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