Investors will look to the Fed to calm the market next week, but it could be a tall order


Jerome Powell, chairman of the Federal Reserve, testifies before the House of Representatives Financial Services Committee during a hearing on the Treasury Department’s oversight of the Treasury Department and the Federal Reserve’s response to the outbreak of coronovirus disease (COVID-19), including Washington in Capitol Hill , America, June 30, 2020.

Tasso Katopodis | Reuters

Markets are seeing the Federal Reserve as a soothing force when it meets in the week, but stocks may remain choppy when the central bank is disappointed and investors focus on elections and economic recovery.

The Fed’s two-day meeting is expected to end on Wednesday, as it is moderate in its statements and there is some clarity on plans to use further guidance. The Fed has also updated its economic and interest rate outlook, including a 2023 forecast for the first time.

Quincy Crosby, chief investment strategist at Prudential Financial, said the stock market could easily disappoint as the Fed is unlikely to offer more clarity on monetary policy, such as a plan to buy bonds.

“The market is concerned that the Fed is not giving us clear readings on their plans for monetary policy,” he said. The Fed’s extraordinary policies have been an important factor behind the 50% surge in the stock market on March 23. It is also seen as a major factor limiting the depth of market selling.

Peter Bokover, chief investment officer of the Blakeley Advisory Group, said the Fed is unlikely to have much of a tweak and continues to buy $ 80 billion a month in the Treasury. “I don’t think they will do anything for the markets,” he said.

Stocks were volatile last week, hardening and re-rallying, leaving the S&P 500 with a decline of nearly 3% for the week. The hard hit Nasdaq was down about 5% for the week. The quadrupling of options and futures at the end of the coming week could add volatility.

Bank of America strategists said the bond market is looking to the Fed for any balance sheet adjustments and changes to further guidance, including the Fed’s recent tweak in its inflation policy. The Fed changed its policy to focus on the target inflation rate at an average rate, meaning that it cannot tighten the policy if inflation meets its 2% target.

Bank of America strategists said, “We see that the guidance provided by the Fed reduces the risk of rates, which would support higher back-end rates and a steady curve.” The benchmark 10-year yield dropped in the past week, touching 0.67% on Friday, and could be higher, meaning the bond could sell, if the Fed clarifies policy around its bond purchase program does not do.

Crosby said the stock market is hoping for a dove Fed. “The market needs it now because fiscal policy is not going anywhere,” he said.

BTIG strategist Julian Emanuel said the market could focus on the fact that Congress failed to take an edge on fiscal stimulus if economic data began to disappoint.

August retail sales are expected on Wednesday morning, as the Fed meets. They are expected to grow by 1%, and should have a critical look at whether the lack of unemployment benefits, which ended July 31, affects consumer spending. Among other things, Republicans and Democrats could not agree on how to change the $ 600 weekly payment to the unemployed.

Emanuel, head of equity and derivatives strategy, said, “Based on the election and economic data, the probability of incentives rises and falls.”

“Our view is that a lot is going to happen next week just with the possibility of expanding the front and back limits, if the political narrative is more affected,” Emanuel said. Emanuel expects market turmoil to decline and fall in the month of October, as investors worry about uncertainty during the presidential election.

The Fed’s meeting this week is final before the election, and analysts expect Fed Chairman Jerome Powell to assure that the Fed will do whatever it takes to support the economy. Powell holds a briefing after Wednesday’s meeting, and is also asked about the possibility of high inflation. The Fed has said it is more concerned about the devolution, but recent inflation figures have been warmer than expected, though still below 2%.

“There is a tug of war among those who buy chips now because inflation is rising. Versus those who say deflationary forces are still making their way into the economy,” Crosby said.

Mark Chandler, chief market strategist at Bannockburn Global Forex, said he expected the Fed to get solid assurances, but it is unlikely to discuss targets for bond purchases or the yield curve some investors were hoping to control. Yield curve control would mean that the Fed would try to manage interest rates by targeting purchases of specific treasuries. For example, it may try to keep long-term yields low, and buy 10 years.

Chandler also mentioned that the Fed’s $ 7 trillion balance sheet had recently fallen by almost $ 100 billion from its peak, and that its bond purchases fell behind the European Central Bank.

He said, “My understanding is that the Fed is saying that it is not worried about inflation. Its big concern is the downside risk. They will repeat their call for fiscal stimulus that is likely to subside later this week ,” They said.

Chandler said the stock market may continue to pick up in the coming week, but he is not expecting a sharp sell-off. The dollar may decline, if the Fed feels it, and it is positive for the stock.

“I don’t think there’s a 10% pullback [in Nasdaq] There is enough pain to calm people. This is just a general improvement, and we are going to create new heights, ”he said.

Week calendar

Tuesday

FOMC meeting begins

8:30 am import prices

8:30 am Empire State Manufacturing

Industrial production at 9:15 am

Wednesday

8:30 am retailing

8:30 am Business Leaders Survey

NAHB Survey at 10:00 AM

10:00 AM Business Invention

Fed’s decision at 2:00 p.m.

Fed Chairman Jerome Powell briefing at 2:30 p.m.

4:00 pm TIC data

Thursday

8:30 am unemployed claims

Accommodation starts at 8:30 am

8:30 am Philadelphia Fed Survey

Friday

Current account at 8:30

10:00 AM consumer sentiment

10:00 AM St. Louis Fed President James Bullard

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