The fate of the stock market comes down to the next 13 trading sessions

(Bloomberg) – Four major events over the next 13 trading sessions will be the main catalysts in determining whether this year’s stock market rally is derailed or starts to roll again after a fall in February.

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It all starts Tuesday, when Federal Reserve Chairman Jerome Powell delivers his biannual two-day testimony on monetary policy on Capitol Hill. With the S&P 500 index coming off its best week in a month, investors will be on the lookout for any clues to the central bank’s interest rate hike trajectory.

“The market is latching onto every positive thing Powell says,” said Emily Hill, founding partner of Bowersock Capital. “As soon as the word ‘disinflation’ left his lips in a speech earlier this year, the market soared.”

Indeed, the rally late last week was spurred by Atlanta Fed chief Raphael Bostic, who said the central bank could take a break this summer.

After Powell comes the February jobs report on March 10 and the consumer price index on March 14.

“There are such mixed signals in the economy,” Hill said. “So you’re going to see some overreaction from investors to the data coming in.”

Then, on March 22, the Fed will issue its policy decision and quarterly interest rate projections, and Powell will hold its press conference. After that, investors should have a pretty clear idea of ​​whether the central bank will halt its rate hikes in the coming months.

Investors are worried about most of this. Futures implied volatility is back in the low 30s for the Consumer Price Index day and close to 40 for the Fed’s rate decision day later, meaning traders are betting on wide swings, according to data compiled by Citigroup. However, a forward implied volatility reading of 26 on the day of jobs data indicates the market is underpricing this risk, according to Stuart Kaiser, head of Citigroup’s US equity trading strategy.

As for the stock market itself, the prevailing sentiment has been calm. The S&P 500 posted daily movement of less than 0.5% in either direction for the three trading days ending March 1, a streak of tranquility last seen in January when investors stepped up bets on the fact that the US economy could avoid a recession as inflation recedes.

Here’s what traders will be watching.

Powell’s Testimonial

The Fed Chairman’s semi-annual monetary policy report to the US Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday is expected to provide insights into the US economic outlook, particularly inflation, wage pressures and employment. Traders will also be looking for clues as to what additional steps the Fed will take to control high prices.

Report on the work

The labor market was strong in January. It is an important driver of inflation, as wage growth can keep prices higher. And that’s a risk for stock prices, because sticky inflation would prevent the Fed from suspending rate hikes. Economists predict February’s unemployment rate will hit 3.4%, unchanged from January. Nonfarm payroll growth is expected to fall to 215,000 after a surprising explosion of 517,000 jobs a month earlier. But ultimately, the data comes down to wages and whether the Fed thinks they are slowing fast enough to bring inflation down.

Inflation data

February’s consumer price index reading is crucial, after surging at the start of the year. Any sign of persistent inflation could push the Fed to raise rates even higher than expected. The CPI forecast for February is 6%, an improvement from January’s 6.4%. Core CPI, which excludes the volatile food and energy components and is considered a better underlying indicator than the headline measure, is expected to rise 5.4% from February 2022 and 0 .4% compared to the previous month. The Fed’s inflation target, which takes into account more than just the CPI reading, is 2%.

Fed decision

The market is looking for an interest rate peak in September at 5.4%, almost a full percentage point above the current effective federal funds rate. Traders are bracing for the possibility of the Fed returning to giant rate hikes, with overnight index swaps pricing around 31 basis points of tightening later this month.

Of course, the Fed’s forward expectations and Powell’s comments after the decision will affect market sentiment. But these are big misses, like much warmer-than-expected inflation readings, that would derail attempts at a stock market rally, according to Michael Antonelli, market strategist at Baird.

“If the terminal rate goes from 5% to 5.5%, it will be a headwind, but it won’t crater the stock market like it did last year,” Antonelli said in an interview. telephone. “Last year we didn’t know what the worst-case scenarios would look like, but this year the window of potential outcomes is much narrower. And investors like that.

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