A trader on the NYSE, March 11, 2022.
Source: New York SE
Markets face a potentially hot inflation report in the coming week and a series of big bank wins to start the earnings season.
JPMorgan Chase and BlackRock announce financial industry first-quarter earnings releases on Wednesday, while Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs report on Thursday.
The war in Ukraine will remain in focus as investors watch for signs the crisis is turning.
Quincy Krosby, chief equity strategist at LPL Financial, said first-quarter earnings reports from the financial sector will be important to a market given the impact of the Federal Reserve’s plans to hike interest rates and aggressively tighten policy.
“We want to get a picture of how they view the Fed’s plan…the quantitative tightening, the liquidity outflow, coupled with higher interest rates, affecting their customers and their businesses,” Krosby said. “If you look at the XLF [Financial Select Sector SPDR Fund ETF], on days when things go up, it’s the insurance companies because they increase premiums. Higher interest rates are good for banks until, it is believed, higher interest rates hurt the economy.”
For the week, the Dow Jones Industrial Average was down 0.3%, but the rate-sensitive Nasdaq Composite was down 3.9% and the S&P 500 was down 1.3%. According to Wells Fargo’s Michael Schumacher, the rise in the 10-year Treasury yield topped 30 basis points for a third week in a month. One basis point equals 0.01%.
The 10-year rose over 2.7% on Friday.
“It was on jet fuel,” Schumacher said. He said the 10-year yield, which moves inversely with price, was boosted last week by the Fed signaling that it plans to expand its balance sheet by $95 billion a month.
The 10-year term is important as a benchmark and also because it is an interest rate that affects mortgages and other loans.
“People say that the balance sheet will move the 10s quite a bit,” said Schumacher. He said he couldn’t rule out an increase in the yield to 3% given the speed at which the yield has been moving recently.
Economic data in the coming week could be a catalyst for further upside.
The four-day holiday week is packed with economic reports. Some are released on the Good Friday market holiday. The highlight is Tuesday’s CPI for March, which is expected to beat the 7.9% reported for February.
“It’s big. It’s the final key data point ahead of the Fed’s May 3 meeting,” Schumacher said. A hot read that is even in line with expectations will encourage the market to expect a 50 basis point or half percent hike from the Fed at this session. The Fed started its hike cycle in March with a quarter point hike.
The producer price index is to be published on Wednesday. Data on retail sales and consumer sentiment is due Thursday. On the Friday market holiday, Empire State manufacturing and industrial production are released.
Barclays economists expect CPI to have risen by 1.24% in March, up an impressive 8.5% year-on-year, the highest in 40 years. “We expect annual CPI to peak in March and move down thereafter, supported by positive base effects,” the economists wrote.
The Fed’s preferred measure of inflation, the Personal Consumption Spending Deflator, will be released on April 29, but the CPI and PPI will both set the tone for this report.
“We’ve had such a strong move in yields. Sentiment on rates is so gloomy that I wouldn’t be surprised if we saw a relief rally in rates after seeing the March CPI,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
“While the inflationary pressures will still be there, I think March would be the highest rate of inflation based on the rate of change… You could get some rotation [in stocks] next week if you get a Bond bounce,” Boockvar said.
Schumacher said the bond market will also be watching the Bank of Canada for an expected rate hike at its Wednesday meeting and the European Central Bank for comment on its asset purchases at its Thursday meeting.
winning season
According to Refinitiv, first-quarter earnings for the S&P 500 are expected to rise 6.1%, but the financials sector is expected to see a 22.9% decline.
LPL’s Krosby anticipates a choppy trade. “I think it’s going to be a tough quarter,” she said. She said investors are watching the market absorb a 50 basis point hike. Quantitative tightening, known as QT, is also a policy tightening.
“The QT could start next month. There is a point [the Fed] can’t wait any longer,” she said.
Krosby said she recommends a defensive focus, favoring consumer staples, real estate mutual funds and healthcare, as well as consumer discretionary names that emphasize cost savings for consumers.
“I suspect that late next week with the long weekend approaching, people will want to reduce risk, but I suspect it could be a pretty bumpy ride with CPI before we see that,” Schumacher said.
Calendar of the week ahead
Monday
9:30 am Fed Governor Michelle Bowman, Fed Governor Christopher Waller at the Fed Listens event
9:30 am Atlanta Fed President Raphael Bostic
12:45 p.m. Chicago Fed Chairman Charles Evans
1:00 p.m. Auction for $46 billion of 3-year notes
Tuesday
Merits: Albertsons, Carmax
6:00 a.m. NFIB Small Business Survey
8:30 CPI
12:10 pm Fed Governor Lael Brainard at Wall Street Journal jobs summit
1:00 p.m. Auction of $34 billion of 10-year notes
14:00 federal budget
6:45 p.m. Richmond Fed President Tom Barkin
the Wednesday
Merits: JPMorgan, BlackRock, Delta Air Lines, Bed Bath & Beyond, Rent the Runway, Fastenal, Infosys, First Republic Bank
8:30 a.m. PPI
1:00 p.m. 30-year bond auction
Thursday
Merits: Goldman Sachs, Citigroup, Wells Fargo, Morgan Stanley, US Bancorp, UnitedHealth, PNC Financial, Rite Aid, Ally Financial, State Street
8:30 am First claims
8:30 a.m. Retail sale
8:30 a.m. Import prices
10:00 a.m. Consumer sentiment
10:00 a.m. Company inventory
14:00 Early closing for the bond market
3:50 p.m. Cleveland Fed President Loretta Mester
6:00 p.m. Philadelphia Fed Chairman Patrick Harker
Friday
The markets are closed for the Good Friday holiday
8:30 a.m. Empire State Manufacturing
9:15 a.m. Industrial production
4:00 p.m. TIC data