The stock market faces a crucial test this week: 3 questions to decide the fate of the rally

There will be no rest for investors this week as they await a landmark report on the state of the US labor market, as well as semi-annual congressional testimony from Federal Reserve Chairman Jerome Powell.

To complicate matters further, investors will also be watching the reaction of equities to more attractive risk-free yields in the bond market after the yield on the 10-year Treasury note last week temporarily breached the 4% threshold, many s waiting for it to climb. Even further.

Was January’s job count a ‘fluke’?

On the economic data front, the most important question investors will be looking to answer is whether January’s huge job gains carried over into February. The U.S. economy added 517,000 jobs in January, according to the Labor Department, far exceeding expectations and triggering a market reflection on how high the Federal Reserve will raise interest rates in its effort to bring the economy down. inflation.

Since then, weekly jobless claims have continued to show few Americans applying for jobless benefits, fueling expectations that another blockbuster jobs gain could be due in February data next Friday, which in turn could force the Federal Reserve to resort to even more aggressive interest rate hikes, according to Steve Sosnick, chief strategist at Interactive Brokers, in a phone call with MarketWatch.

“Is it going to turn out that the figure we got last month was a coincidence? Or is this part of a new trend? said Sosnick.

Read: Warm weather means stock investors shouldn’t be looking for a cooler February jobs report: Economist

What will Powell say?

Investors have not heard from Powell since he took part in a question-and-answer session at the Economic Club of Washington on Feb. 7.

During his back and forth with private equity billionaire David Rubenstein, Powell reiterated that signs of disinflation were emerging, although he acknowledged that a return to the Fed’s 2% target would likely be “bumpy”. “.

Since then, a series of warmer than expected inflation reports have shown that a series of waning price pressures may be coming to an end.

The cost of living rose 0.5% in January, the biggest increase in three months, according to the consumer price index released on February 14. The annual inflation rate, meanwhile, slowed again to 6.4% from 6.5%, but economists expected an even bigger drop. January’s producer price index and core personal consumption expenditure index, the Fed’s preferred measure of inflation, were also hotter than expected.

As a result, investors will be listening closely to Powell to see what the Fed Chairman has to say about the central bank’s efforts to crush inflation when he visits Capitol Hill on Tuesday for testimony before the Senate Banking Committee. , followed by testimony before the House. Financial Services Committee a day later.

“If the Fed is truly data dependent, the latest inflation data is not at all what the Fed wants to see. So how is Powell going to dance around this? Sosnick told MarketWatch in a phone interview.

Check: Powell will speak to Congress about the possibility of more interest rate hikes, not less

How will stocks react to higher returns?

In addition to economic data and Powell’s comments, investors will also be watching the impact of higher bond yields on equities.

The fact that investors can now earn a return of over 5% simply by buying six-month Treasury bills means stocks now face major competition from a much less risky asset class, according to Callie Cox, US investment analyst at eToro.

Additionally, many on Wall Street expect bond yields to continue to climb, which could add pressure to U.S. equity benchmarks like the S&P 500 Index.


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“We expect the rate adjustment to not be complete,” according to a team of economists from Mizuho Securities.

See: Inflation data pushed the 10-year Treasury yield above 4%. How high can interest rates go?

Uncertainty abounds

Investors started the year expecting the Fed to cut interest rates as early as this fall. However, warmer than expected economic data and warnings of further rate hikes from Fed officials have since tempered this view.

Namely, movements in fed funds futures suggest that investors see a much lower likelihood of rate cuts later this year, according to the CME’s FedWatch tool. while the fed funds rate is expected to peak well above 5%.

It remains to be seen exactly how far the Fed will raise interest rates. Some are betting that the central bank could eventually raise its key rate to as much as 6% or more, according to Mohannad Aama, portfolio manager at Beam Capital.

“There is still so much uncertainty,” Aama said.

Because of this, each data point could potentially influence investors’ expectations for how big the rate hike will be, which could potentially affect or boost stocks, he said.

US equities suffered in February, with major indices losing ground and hampering a rally at the start of 2023. However, stocks rebounded last week, with the Dow Jones posting a four-straight weekly loss streak and the S&P 500 breaking a three-week sequence.

The Dow Jones rose 1.8% last week, while the S&P 500 rose 1.9% and the Nasdaq Composite added 2%.

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