As stocks enter volatile period, the Fed will attempt to not rock the boat further in the week ahead
Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, July 15, 2021.
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The Federal Reserve’s much-anticipated meeting in the coming week may not be quite as exciting for markets as some investors had been expecting in the usual choppy month of September.
The meeting is the highlight of the coming week, traditionally a negative time for stocks. Stocks were slightly lower in the past week.
The two-day meeting of central bank officials begins Tuesday. Wednesday’s announcement will be followed by a briefing with Fed Chairman Jerome Powell.
Housing data is the most important part of the economic calendar. There are starts and permits on Tuesday, as well existing home sales and Wednesday’s closing. A handful of companies are reporting earnings, including Costco Wholesale, FedEx and Nike.
The Fed’s meeting may not be as eventful as investors once expected. Some strategists expected the central bank’s withdrawal from its bond-buying program to create volatility for stocks. However, the Fed may only speak about tapering during the next meeting. It could signal it might slow bond purchases later this year.
They’re very transparent in my opinion about the tapering guidance. Michelle Meyer, Bank of America’s head of U.S. Economics, said that they receive an “A+” for communicating their intentions about the balance sheet. They said that they wanted to make baby steps, and they did. Expect an announcement in November, and then the actual cutting back on bond purchases before the end.
It is significant that the Fed’s $120 billion per month bond purchasing program will be ended. This would mark the end of extraordinary Fed policies used in fighting the pandemic. The Fed is now closer to increasing interest rates.
“Everybody’s been calling for a correction, and it’s always hard to see what the catalyst could be. Jim Caron of Morgan Stanley Investment Management’s global macro strategy, said the catalysts for a correction now are clearer than they have been throughout the year.
For now, Caron sees the Fed’s communications in the week ahead as less of a risk for markets than other simmering issues, like the debt ceiling, the potential for more taxes and uncertainty surrounding the White House’s infrastructure bill.
Congress has until sometime in October to extend the debt ceiling before the government runs out of funds and defaults. Political rhetoric around raising the debt limit, which would allow Treasury to issue more debt, has been building. If Congress doesn’t act, Friday was warned by the White House that there is a possibility of a global recession.
“I believe that the Fed is trying to keep out the fight at the moment. Caron stated that there is too much uncertainty. “… They’re not going announce tapering. The statement will be precise. Their statements will not be too hawkish. The Fed should know a lot more about where the infrastructure and debt ceiling are by the time of their next meeting.
What the Fed could do
The odds for a September tapering announcement from the Fed fell sharply after August’s softer than expected employment report showed just 235,000 jobs were created, about 500,000 less than expected.
While economists expect an announcement in November, most experts believe that September will be the best month to hear what the Fed has to say.
Along with Wednesday’s 2 p.m. statement, the Fed releases its quarterly forecasts. The forecasts contain updated economic projections, as well an updated interest rate forecast.
Caron stated that although they don’t seem to want to be too hawkish, the “dot plot” could still come out this way. “The Fed’s Interest Rate Forecast” or the so-called dotsplot is an anonymous presentation of Fed officials’ interest rates targets in chart form.
Fed observers expect that the central bank will slightly move forward its forecast for interest rates. According to the dotsplot, there was a dot plot that showed two rate rises in 2023 and zero for 2022.
Meyer said that the Fed’s two officials prevented from having half of a hike while three Fed officials were barred from getting an entire hike in 2022. I believe the dots will indicate the first hike in 2023. However, it’s possible for it to shift…It is up to the Fed, if it does shift, that will be a problem.
Meyer claimed Powell had stressed that winding down asset purchase programs isn’t tied to Fed raising interest rates. The market could be influenced by the Fed’s interest rate forecast if it moves in the right direction. This would suggest that the Fed is likely to end its bond program immediately and move to a rate increase. Over six months, it is expected that the bond program will slowly be unraveled.
September has been weak so far for the market, with the S&P down 1.7% as of Friday afternoon.
However, J.P. Morgan’s technical strategists do not expect the huge downdraft that some analysts are expecting.
They note that so far, the S&P 500 has held above 4,420 to 4,435 trend support levels and another key level of 4,367.
We believe that the index will rally in the fourth quarter, as a base case view. We believe that the 4238-4255 summer-time breakout zone will keep the index from falling even if it breaks resistance and experiences a short-term rise in realized volatility,” they wrote.
Investors continue to watch for earnings warnings ahead of the third quarter reporting season, which starts in mid-October. Concern is that supply chain risk will continue to reduce revenues and potentially impact margins.
A few companies will report in the coming week. They should discuss rising costs and supply chain risks. FedEx reports Tuesday; General Mills releases earnings Wednesday, and both Nike and Costco report Thursday.
Nike is being watched closely since it is expected that supply chain issues will hurt its profits and it could continue to have issues getting products to sell.
Week ahead calendar
10:00 a.m. NAHB survey
FOMC begins 2-day meeting
8:30 a.m. Housing starts
8:30 a.m. Current account
10:00 a.m. Existing home sales
2:00 p.m. Federal Reserve statement
2:30 p.m. Fed Chairman Jerome Powell briefing
8:30 a.m. Weekly jobless claims
9:45 a.m. Manufacturing PMI
9:45 a.m. Services PMI
8:45 a.m. Cleveland Fed President Loretta Mester
10:00 a.m. New home sales
10:00 a.m. Fed Chairman Jerome Powell, Vice Chairman Richard Clarida, Fed Governor Michelle Bowman at Fed Listens event
10:00 a.m. Kansas City Fed President Esther George