Federal Reserve Chair Jerome Powell testifies before Congress in the week ahead, and markets will hang on what he says regarding how the Russia-Ukraine conflict could affect Fed policy.
Investors may take the Federal Reserve’s first post-pandemic interest rate hike in stride, while uncertainty over the Ukraine crisis continues to hang over markets.
The Fed has clearly broadcast that it intends to raise its target fed funds rate by a quarter percentage point from zero, and it is expected to announce that move at the end of its two-day meeting Wednesday. The central bank should also reveal new forecasts for interest rates, inflation and the economy.
There are a few economic reports of note in the week ahead, including the producer price index Tuesday, retail sales Wednesday and existing home sales Friday.
“Earnings are over. Monetary policy is obviously going to be important here. I don’t see the Fed surprising anyone next week,” said Steve Massocca, managing director at Wedbush Securities. “It’s going to be a quarter point and then step into the background and watch what’s happening in Europe.”
Stocks fell for the past week, with the Nasdaq Composite the worst performer with a 3.5% decline. Meanwhile, the small-cap Russell 2000, which outperformed the three major indexes, lost 1% for the week.
A surge in oil prices spooked investors, with crude spiking to $130 at the beginning of the week but trading back below $110 on Friday.
The S&P 500 was down about 2.9% for the week. Energy stocks were the top performers, up nearly 1.9% and the only positive major sector.

Fed ahead

The impact of Russian sanctions on commodities markets and the lack of clarity around the outcome of the war in Ukraine are likely to keep volatility high across the financial markets.
The central bank’s statement and comments from Federal Reserve Chairman Jerome Powell on Wednesday will be closely watched for guidance on how Fed officials view the Ukraine crisis, and how much it could affect their outlook and the path for interest rates.
“His guidance is probably not going to be all that different from what he had to say in the [Congressional] testimony. Basically, downside risks to the growth outlook have increased. Upside risks to inflation have risen,” said Mark Cabana, head of U.S. short rates strategy at Bank of America.
Because Russia is a giant commodities producer, its assault on Ukraine and resulting sanctions have set off a rally in commodities markets that has made already-scorching inflation even hotter. February’s consumer price index was up 7.9%, and economists said rising gasoline prices could send it above 9% in March.
Gasoline at the pump jumped nearly 50 cents in the past week to $4.33 per gallon of unleaded, according to AAA.
Market pros see surging inflation as a catalyst that will keep the Fed on track to raise interest rates. However, uncertainty about the economic outlook could also mean the central bank might not hike as much as the seven rate increases that some economists forecast for this year.
Cabana expects Fed officials to forecast five hikes for 2022 and another four next year. The Fed previously anticipated three increases in both years. Cabana said the Fed could cut its forecast for 2024 to just one hike, from the two in their last outlook.
Any comments from the Fed on what it plans for its nearly $9 trillion balance sheet will also be important, since officials have said they would like to begin to scale it back this year after they start hiking interest rates. The Fed replaces maturing Treasury bonds and mortgages as they roll off, and it could slow that in a process Wall Street has dubbed “quantitative tightening” or QT.
“That they will be ready to flip the switch on QT in May is our base case, but we acknowledge there are risks that this will be skewed later,” said Cabana. He said if the Fed finds it is not in a position to raise interest rates as much as it hoped, it could delay shrinking the balance sheet right away, which would leave policy looser.

Bond market liquidity

The 10-year Treasury yield topped 2% at its highest level Friday, after dipping below 1.7% earlier this month as investors sought safety in bonds. Bond yields move opposite price.
“It’s inflation and inflation expectations. Treasurys behave in this environment a little differently than a flight to quality asset,” Cabana said “That’s a different dynamic than we’ve observed. You may see a flight to quality into Treasurys, but the Treasurys are reflecting higher inflation expectations.”
Cabana said the markets are showing signs of concern around the uncertainty in Ukraine. For instance, the Treasury market is less liquid.
“We have seen that the Treasury market has become more volatile. We’re seeing bid-ask spreads have widened. Some of the more traditionally less liquid parts of the market may have become less liquid, like TIPS and the 20-year. We’re also seeing market depth thinning out,” he said. “This is all due to elevated uncertainty and lack of risk-taking willingness by market participants, and I think that should worry the Fed.”
But Cabana said markets are not showing major stress.
“We’re not seeing signs the wheels are falling off in funding or that counterparty credit risks are super elevated. But the signs there are very much that all is not well,” he said.
“The other thing we continue to watch loosely are funding markets, and those funding markets are showing a real premium for dollars. Folks are paying up a lot to get dollars in a way they haven’t since Covid,” he said.
Cabana said the market is looking for reassurance from the Fed that it is watching the conflict in Ukraine.
“I think it would upset the market if the Fed reflected a very high degree of confidence in one direction or another,” he said. “That seems very unlikely.”

Dollar strength

The dollar index was up 0.6% on the week and it has been rising during Russia’s attack on Ukraine. The index is the value of the dollar against a basket of currencies and is heavily weighted toward the euro.
Marc Chandler, chief market strategist at Bannockburn Global Forex, also points out that the dollar funding market is seeing some pressure but it is not strained.
“The dollar is at five-year highs today against the yen. That’s not what you would expect in a risk-off environment,” he said. “That’s a testament to the dollar’s strength.”
Chandler said it’s possible the dollar weakens in the coming week if it follows its usual interest rate hike playbook.
“I think there might be a buy the rumor, sell the fact on the Fed,” he said. “That’s typical for the dollar to go up ahead of the rate hike and sell off afterwards.”

Oil on the boil

Oil gyrated wildly this past week, touching a high not seen since 2008, as the market worried there would not be enough oil supply due to sanctions on Russia. Buyers have shunned Moscow’s oil for fear of running afoul of financial sanctions, and the U.S. said it would ban purchases of Russian oil.
West Texas Intermediate crude futures jumped to $130.50 per barrel at the beginning of the week but settling Friday at $109.33.
“I think the market getting bid up to $130 was a little premature,” said Helima Croft, head of global commodities strategy at RBC, noting the U.S. ban on Russian oil. She said the run-up in prices Monday came as market players speculated there would be a broader embargo on Russian oil, including Europe, its main customer.
“Right now, the market is too extreme in either way. I think it’s justified at $110. I think it’s justified over $100. I don’t think we’re headed for an off-ramp, and I think we have room to go higher,” she said.

Stocks are likely to be volatile in the week ahead as investors watch tensions between Russia and Ukraine and debate how quickly the Federal Reserve can raise interest rates.
Markets were roiled in the past week and bond yields spiked after a hot inflation reading Thursday upended many Wall Street forecasts for interest rate hikes. Investors were dealt another blow Friday after the White House warned that Russia could invade Ukraine during the Olympics. Both the U.S. and U.K. have called for their citizens to leave Ukraine as soon as possible.
“I think the Fed is keeping everyone on edge, and this is going to add to that edginess,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “So we had a three-week earnings respite from the macro. We turned micro, and this week we were reminded earnings season is pretty much over and all macro issues matter again.”
The major averages slid sharply on Friday afternoon, and Treasury yields came off the highs they set after Thursday’s report that January’s consumer price index jumped by 7.5%, a 40-year high. The S&P 500 lost 1.8% for the week, falling to 4,418.
With about two hours left to Friday trading, U.S. National Security Advisor Jake Sullivan told a White House briefing that there were signs of Russian escalation at the Ukraine border. Sullivan said it was possible an invasion could occur during the Olympics, despite speculation to the contrary.
“Up until now, I’d say it was all about monetary policy. This throws an extra unknown into the works,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The dollar is rallying, oil prices have rallied and stocks are selling off... Even if nothing happens this weekend, people will be nervous about it in the next week.”
Boockvar said the Russian tensions complicate the central bank’s outlook, and an invasion would add to already hot global inflation. “It’s causing problems for the Fed because this basically would inflate oil prices, food prices, wheat, fertilizers and everything else and just make the Fed’s inflation fighting capability that much more difficult to maneuver,” he said. “The Fed can’t back off. You can’t blame geopolitics as a reason not to hike rates.”
He said if the central bank were concerned about an economic impact, it could slow hikes.

Fed’s inflation fight

By Friday morning, some economists had ratcheted up expectations for the Fed to hike interest rates by a half point in March, following the January inflation report. Others, like economists at Goldman Sachs, have raised their views to a faster pace, with as many as seven quarter-point hikes for this year.
Fed speakers will be a highlight in the week ahead, particularly St. Louis Fed President James Bullard who appears on CNBC’s “Squawk Box” Monday at 8:30 a.m. Bullard added to market turbulence and the sharp jump in bond yields Thursday when he said that he would like to see rates rise by 100 basis points (or 1 percentage point) by July.
“I think volatility remains elevated as we transition from essentially this more dovish Fed to this more hawkish Fed policy which we’re experiencing,” said Patrick Palfrey, senior equity strategist at Credit Suisse. “We haven’t yet settled on how hawkish we are going to be and until we can chart a new path for interest rates hikes with some consistency, I think volatility is going to remain elevated, and that’s going to be more true for high valuation companies.”

What to watch

The Federal Reserve releases minutes from its last meeting on Wednesday. Investors will watch it carefully for any new insights on its plans for rate hikes, the inflation outlook or comments on its balance sheet.
There will also be more important inflation data, when the producer price index is reported Tuesday. That report is also expected to be very hot, after January’s CPI. Surging inflation has caused consumer sentiment to slump, and now economists are watching consumer spending closely. That means January’s retail sales will also be important when it is reported Wednesday.
There is also a final rush of big earnings reports, with Cisco, Nvidia and AIG Wednesday. Walmart reports Thursday, and Deere reports Friday.
“We’re starting to transition beyond earnings, I think investors took a fair amount of comfort that profit margins stayed as high as they did,” said Palfrey. “I think the question is as we look out at the next couple of quarters, are we able to pass through prices at the same rate?”

Fed debate

Palfrey said investors are looking for more clear communications from the central bank. Bullard is the only Fed official who endorsed a 50-basis-point hike, while others, like Cleveland Fed President Loretta Mester said she does not expect to raise the fed funds target rate by more than a quarter point. Fed Chairman Jerome Powell has left the door open to a half point hike but did not say he favored it.
Fed Governor Lael Brainard speaks Friday, as does Fed Governor Christopher Waller. Mester speaks Thursday.
Other Fed officials have pushed back on Bullard’s comments. But still, there is a high level of uncertainty in the market, and bond pros are wondering if the St. Louis Fed chief will walk back his comments Monday morning.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said some investors wonder if market volatility could slow the central bank’s tightening path.
“The Fed is full steam ahead. They have to be... They’re still adding to the balance sheet. We’re still at zero on rates,” she said. “There’s nothing in my mind, unless an asteroid lands on earth and blows us all to smithereens, that makes the Fed say we’re fine, we’re going to stay at zero.”
“They’re admitting themselves they’re behind the curve. They let the inflation cat out of the bag. I don’t think they thought it would have the traction it has had,” she said.

Rate rally and reverse

When bonds sell off, yields go higher and they jumped this past week. The 10-year yield was as high as 2.06% Friday. After the Ukraine news, the 10-year yield was back down to about 1.93%.
The 2-year yield was at a high of 1.63% Friday, up from 1.32% the week earlier. The biggest moves were Thursday, and the yield on the 2-year note moved more than 20 basis points Thursday. But by Friday afternoon, it had fallen back to 1.51%.

Stocks are likely to be volatile in the week ahead as investors watch tensions between Russia and Ukraine and debate how quickly the Federal Reserve can raise interest rates.
Markets were roiled in the past week and bond yields spiked after a hot inflation reading Thursday upended many Wall Street forecasts for interest rate hikes. Investors were dealt another blow Friday after the White House warned that Russia could invade Ukraine during the Olympics. Both the U.S. and U.K. have called for their citizens to leave Ukraine as soon as possible.
“I think the Fed is keeping everyone on edge, and this is going to add to that edginess,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “So we had a three-week earnings respite from the macro. We turned micro, and this week we were reminded earnings season is pretty much over and all macro issues matter again.”
The major averages slid sharply on Friday afternoon, and Treasury yields came off the highs they set after Thursday’s report that January’s consumer price index jumped by 7.5%, a 40-year high. The S&P 500 lost 1.8% for the week, falling to 4,418.
With about two hours left to Friday trading, U.S. National Security Advisor Jake Sullivan told a White House briefing that there were signs of Russian escalation at the Ukraine border. Sullivan said it was possible an invasion could occur during the Olympics, despite speculation to the contrary.
“Up until now, I’d say it was all about monetary policy. This throws an extra unknown into the works,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The dollar is rallying, oil prices have rallied and stocks are selling off... Even if nothing happens this weekend, people will be nervous about it in the next week.”
Boockvar said the Russian tensions complicate the central bank’s outlook, and an invasion would add to already hot global inflation. “It’s causing problems for the Fed because this basically would inflate oil prices, food prices, wheat, fertilizers and everything else and just make the Fed’s inflation fighting capability that much more difficult to maneuver,” he said. “The Fed can’t back off. You can’t blame geopolitics as a reason not to hike rates.”
He said if the central bank were concerned about an economic impact, it could slow hikes.

Fed’s inflation fight

By Friday morning, some economists had ratcheted up expectations for the Fed to hike interest rates by a half point in March, following the January inflation report. Others, like economists at Goldman Sachs, have raised their views to a faster pace, with as many as seven quarter-point hikes for this year.
Fed speakers will be a highlight in the week ahead, particularly St. Louis Fed President James Bullard who appears on CNBC’s “Squawk Box” Monday at 8:30 a.m. Bullard added to market turbulence and the sharp jump in bond yields Thursday when he said that he would like to see rates rise by 100 basis points (or 1 percentage point) by July.
“I think volatility remains elevated as we transition from essentially this more dovish Fed to this more hawkish Fed policy which we’re experiencing,” said Patrick Palfrey, senior equity strategist at Credit Suisse. “We haven’t yet settled on how hawkish we are going to be and until we can chart a new path for interest rates hikes with some consistency, I think volatility is going to remain elevated, and that’s going to be more true for high valuation companies.”

What to watch

The Federal Reserve releases minutes from its last meeting on Wednesday. Investors will watch it carefully for any new insights on its plans for rate hikes, the inflation outlook or comments on its balance sheet.
There will also be more important inflation data, when the producer price index is reported Tuesday. That report is also expected to be very hot, after January’s CPI. Surging inflation has caused consumer sentiment to slump, and now economists are watching consumer spending closely. That means January’s retail sales will also be important when it is reported Wednesday.
There is also a final rush of big earnings reports, with Cisco, Nvidia and AIG Wednesday. Walmart reports Thursday, and Deere reports Friday.
“We’re starting to transition beyond earnings, I think investors took a fair amount of comfort that profit margins stayed as high as they did,” said Palfrey. “I think the question is as we look out at the next couple of quarters, are we able to pass through prices at the same rate?”

Fed debate

Palfrey said investors are looking for more clear communications from the central bank. Bullard is the only Fed official who endorsed a 50-basis-point hike, while others, like Cleveland Fed President Loretta Mester said she does not expect to raise the fed funds target rate by more than a quarter point. Fed Chairman Jerome Powell has left the door open to a half point hike but did not say he favored it.
Fed Governor Lael Brainard speaks Friday, as does Fed Governor Christopher Waller. Mester speaks Thursday.
Other Fed officials have pushed back on Bullard’s comments. But still, there is a high level of uncertainty in the market, and bond pros are wondering if the St. Louis Fed chief will walk back his comments Monday morning.
Liz Ann Sonders, chief investment strategist at Charles Schwab, said some investors wonder if market volatility could slow the central bank’s tightening path.
“The Fed is full steam ahead. They have to be... They’re still adding to the balance sheet. We’re still at zero on rates,” she said. “There’s nothing in my mind, unless an asteroid lands on earth and blows us all to smithereens, that makes the Fed say we’re fine, we’re going to stay at zero.”
“They’re admitting themselves they’re behind the curve. They let the inflation cat out of the bag. I don’t think they thought it would have the traction it has had,” she said.

Rate rally and reverse

When bonds sell off, yields go higher and they jumped this past week. The 10-year yield was as high as 2.06% Friday. After the Ukraine news, the 10-year yield was back down to about 1.93%.
The 2-year yield was at a high of 1.63% Friday, up from 1.32% the week earlier. The biggest moves were Thursday, and the yield on the 2-year note moved more than 20 basis points Thursday. But by Friday afternoon, it had fallen back to 1.51%.

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Federal Reserve Chair Jerome Powell testifies before Congress in the week ahead, and markets will hang on what he says regarding how the Russia-Ukraine conflict could affect Fed policy.
Investors may take the Federal Reserve’s first post-pandemic interest rate hike in stride, while uncertainty over the Ukraine crisis continues to hang over markets.
The Fed has clearly broadcast that it intends to raise its target fed funds rate by a quarter percentage point from zero, and it is expected to announce that move at the end of its two-day meeting Wednesday. The central bank should also reveal new forecasts for interest rates, inflation and the economy.
There are a few economic reports of note in the week ahead, including the producer price index Tuesday, retail sales Wednesday and existing home sales Friday.
“Earnings are over. Monetary policy is obviously going to be important here. I don’t see the Fed surprising anyone next week,” said Steve Massocca, managing director at Wedbush Securities. “It’s going to be a quarter point and then step into the background and watch what’s happening in Europe.”
Stocks fell for the past week, with the Nasdaq Composite the worst performer with a 3.5% decline. Meanwhile, the small-cap Russell 2000, which outperformed the three major indexes, lost 1% for the week.
A surge in oil prices spooked investors, with crude spiking to $130 at the beginning of the week but trading back below $110 on Friday.
The S&P 500 was down about 2.9% for the week. Energy stocks were the top performers, up nearly 1.9% and the only positive major sector.

Fed ahead

The impact of Russian sanctions on commodities markets and the lack of clarity around the outcome of the war in Ukraine are likely to keep volatility high across the financial markets.
The central bank’s statement and comments from Federal Reserve Chairman Jerome Powell on Wednesday will be closely watched for guidance on how Fed officials view the Ukraine crisis, and how much it could affect their outlook and the path for interest rates.
“His guidance is probably not going to be all that different from what he had to say in the [Congressional] testimony. Basically, downside risks to the growth outlook have increased. Upside risks to inflation have risen,” said Mark Cabana, head of U.S. short rates strategy at Bank of America.
Because Russia is a giant commodities producer, its assault on Ukraine and resulting sanctions have set off a rally in commodities markets that has made already-scorching inflation even hotter. February’s consumer price index was up 7.9%, and economists said rising gasoline prices could send it above 9% in March.
Gasoline at the pump jumped nearly 50 cents in the past week to $4.33 per gallon of unleaded, according to AAA.
Market pros see surging inflation as a catalyst that will keep the Fed on track to raise interest rates. However, uncertainty about the economic outlook could also mean the central bank might not hike as much as the seven rate increases that some economists forecast for this year.
Cabana expects Fed officials to forecast five hikes for 2022 and another four next year. The Fed previously anticipated three increases in both years. Cabana said the Fed could cut its forecast for 2024 to just one hike, from the two in their last outlook.
Any comments from the Fed on what it plans for its nearly $9 trillion balance sheet will also be important, since officials have said they would like to begin to scale it back this year after they start hiking interest rates. The Fed replaces maturing Treasury bonds and mortgages as they roll off, and it could slow that in a process Wall Street has dubbed “quantitative tightening” or QT.
“That they will be ready to flip the switch on QT in May is our base case, but we acknowledge there are risks that this will be skewed later,” said Cabana. He said if the Fed finds it is not in a position to raise interest rates as much as it hoped, it could delay shrinking the balance sheet right away, which would leave policy looser.

Bond market liquidity

The 10-year Treasury yield topped 2% at its highest level Friday, after dipping below 1.7% earlier this month as investors sought safety in bonds. Bond yields move opposite price.
“It’s inflation and inflation expectations. Treasurys behave in this environment a little differently than a flight to quality asset,” Cabana said “That’s a different dynamic than we’ve observed. You may see a flight to quality into Treasurys, but the Treasurys are reflecting higher inflation expectations.”
Cabana said the markets are showing signs of concern around the uncertainty in Ukraine. For instance, the Treasury market is less liquid.
“We have seen that the Treasury market has become more volatile. We’re seeing bid-ask spreads have widened. Some of the more traditionally less liquid parts of the market may have become less liquid, like TIPS and the 20-year. We’re also seeing market depth thinning out,” he said. “This is all due to elevated uncertainty and lack of risk-taking willingness by market participants, and I think that should worry the Fed.”
But Cabana said markets are not showing major stress.
“We’re not seeing signs the wheels are falling off in funding or that counterparty credit risks are super elevated. But the signs there are very much that all is not well,” he said.
“The other thing we continue to watch loosely are funding markets, and those funding markets are showing a real premium for dollars. Folks are paying up a lot to get dollars in a way they haven’t since Covid,” he said.
Cabana said the market is looking for reassurance from the Fed that it is watching the conflict in Ukraine.
“I think it would upset the market if the Fed reflected a very high degree of confidence in one direction or another,” he said. “That seems very unlikely.”

Dollar strength

The dollar index was up 0.6% on the week and it has been rising during Russia’s attack on Ukraine. The index is the value of the dollar against a basket of currencies and is heavily weighted toward the euro.
Marc Chandler, chief market strategist at Bannockburn Global Forex, also points out that the dollar funding market is seeing some pressure but it is not strained.
“The dollar is at five-year highs today against the yen. That’s not what you would expect in a risk-off environment,” he said. “That’s a testament to the dollar’s strength.”
Chandler said it’s possible the dollar weakens in the coming week if it follows its usual interest rate hike playbook.
“I think there might be a buy the rumor, sell the fact on the Fed,” he said. “That’s typical for the dollar to go up ahead of the rate hike and sell off afterwards.”

Oil on the boil

Oil gyrated wildly this past week, touching a high not seen since 2008, as the market worried there would not be enough oil supply due to sanctions on Russia. Buyers have shunned Moscow’s oil for fear of running afoul of financial sanctions, and the U.S. said it would ban purchases of Russian oil.
West Texas Intermediate crude futures jumped to $130.50 per barrel at the beginning of the week but settling Friday at $109.33.
“I think the market getting bid up to $130 was a little premature,” said Helima Croft, head of global commodities strategy at RBC, noting the U.S. ban on Russian oil. She said the run-up in prices Monday came as market players speculated there would be a broader embargo on Russian oil, including Europe, its main customer.
“Right now, the market is too extreme in either way. I think it’s justified at $110. I think it’s justified over $100. I don’t think we’re headed for an off-ramp, and I think we have room to go higher,” she said.