Fed In Focus As Powell Addresses Senate Committee In Testimony Likely To Zero In On Inflation

(Tuesday market open) Today’s main event is Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill soon after Wall Street opens for business. Expect markets to wander today looking for direction from Powell, but it seems unlikely we’ll see a major move unless he says something that really upsets the cart. Little changed overnight.

Powell is expected to address the general shape of the economy and possibly the path of future interest rates, but don’t expect him to make any solid predictions about how high rates might go. He’s said in the past that it’s data-dependent, and it’s hard to imagine him departing from that script, especially with updated Federal Open Market Committee (FOMC) rate projections due March 22.

Yesterday saw an early market rally stamped out by rising Treasury yields. So far this morning, yields are retreating, but that could change quickly depending on what Powell says.

Just in

Trade data from China overnight appeared to signal continued weakness in that economy and perhaps beyond it. Imports fell 10.2% from a year earlier in January-February, compared with a market consensus for a 5.5% fall, according to Trading Economics. The weakness early this year followed a 7.5% decline in December, and purchases declined for a fourth consecutive month. Possible causes? Weak domestic demand, lower commodity prices, and a stronger dollar.

China’s exports fell 6.8% year-over-year, but that’s an improvement from December and better than the expected 9.4% drop, Trading Economics said. Still, any decline in exports from China—a major supplier of goods to the world—could point to slumping global demand.

Closer to home, shares of Meta Platforms (META) climbed 2% in premarket trading after Bloomberg reported the company plans more layoffs. The layoffs could number in the thousands and begin as soon as this week.

Morning rush

• The 10-year Treasury note yield (TNX) slipped 4 basis points to 3.94%.
• The U.S. Dollar Index ($DXY) was steady near 104.5.
• The Cboe Volatility Index® (VIX) futures inched up to 18.8.
• WTI Crude Oil (/CL) dropped slightly to $80.03 per barrel.

Eye on the Fed

Powell’s prepared remarks are likely to be released just before he takes the podium at 10 a.m. ET, but Powell’s Q&A with the Senate committee also could be market-moving if he says anything we haven’t heard before.

It’s a question of tone with Powell, as always. Most Fed officials have sounded hawkish lately, though Atlanta Fed President Raphael Bostic turned down the dial just a bit last week.

Recently, the market’s priced in a terminal, or peak, fed funds rate of around 5.4%, up from the FOMC’s average December projection of between 5% and 5.25%. This repricing led to the sharp pullback on Wall Street last month amid rising Treasury yields following sizzling January employment and inflation data.

Fed officials voiced concern last week that higher rates haven’t necessarily had the impact they’d hoped for and that rates may need to go higher. But how high? Don’t expect Powell to answer that question today or tomorrow (when he addresses the House Financial Services committee). He’ll likely say the Fed needs to stay nimble and watch the data. The FOMC releases updated projections March 22.

Expect Powell to get some tough questions on inflation from congressional representatives weary of facing angry constituents. While inflation has eased in recent months, higher rates have begun to bite and price growth hasn’t necessarily slowed enough to be felt, making many consumers feel like they’re squeezed on both ends. Powell will likely defend the Fed’s policy but may come under pressure to let Congress know how much longer these rate hikes can continue without causing more economic harm.

Stocks in spotlight

China shop: After sluggish Chinese online sales growth in 2022, JD.com (JD)—the country’s biggest online retailer—prepares to report quarterly results early Thursday. Late last month, when Alibaba (BABA), another Chinese e-commerce giant, reported, the jury still appeared to be out on whether China’s shoppers were ready to rush back to their laptops and fill up their grocery carts. Online demand for physical goods remained weak, BABA’s CEO explained during the company’s earnings call. However, he said BABA expects a strong 2023 as retailers try to make up for time lost due to COVID-19 shutdowns. JD could provide more insight into the last week or two of commerce there since BABA reported.

Industrials and energy: China’s conservative projection for 5% economic growth in 2023 could splash cold water on U.S. stock sectors that rely on major demand from the country, including industrials and energy stocks. Materials might be another one to watch. When you see a massive economy like China reopen, one thought is of possible benefits for companies like 3M (MMM), Caterpillar (CAT), Deere (DE), and Chevron (CVX), especially with China being a huge user of industrial commodities like crude oil. Energy’s been a laggard this year, but industrials and materials are among the top-performing sectors of 2023 so far. Can this continue if China has trouble gaining traction? Be on the lookout for any possible softness in the data.

Market minutes

Here’s how the major indexes performed Monday:

• The Dow Jones Industrial Average® ($DJI) rose 40 points, or 0.12%, to 33.431.
• The Nasdaq Composite® ($COMP) declined 0.11% to 11,675.
• The Russell 2000® (RUT) dropped 1.48% to 1,899. This is perhaps a sign of caution ahead of Powell’s remarks. The RUT is more exposed to the domestic economy than other sectors, and Fed policy by its nature has the most impact on U.S. economic trends.
• The S&P 500® index (SPX) added 2.78 points, or 0.07%, to 4,048, just missing a close above technical resistance at 4,050 after trading above that during the session.

Treasuries put the brakes on stocks Monday as the two switched directions around midday. The opening rally in equities coincided with a modest pullback in yields, but as yields climbed starting midmorning, stock indexes gave up most of their gains. This same tug-of-war could get familiar, so market participants should continue watching yields for clues to direction.

Interestingly, the 2-year Treasury yield, which is more sensitive to Fed rate policy, added five basis points Monday while the TNX added only two basis points and stopped climbing just shy of 4%. This means the inversion between them grew even steeper, but it also hints that Treasury market selling late Monday might’ve reflected shorter-term worries about what Powell might say today, not necessarily long-term inflation fears. Monitor the spread as Powell talks to see if it steepens or unwinds slightly from the massive 93-point inversion it reached late Monday.

As we’ve seen lately, the interest-rate-sensitive $COMP suffered more Monday from the yield rally than the $DJI or SPX. Both of those got a nice lift from Apple (AAPL), which climbed almost 2% to extend a rally that began late last week. Info tech led all sectors Monday, though it was hard to find many patterns in the market’s performance. Energy lost ground as natural gas cratered (see chart below), while materials might’ve suffered from China’s weaker-than-expected economic outlook.

Talking technicals: Keep an eye on WTI Crude Oil (/CL) today after yesterday’s rally above $80 per barrel. Its $80.55 close was the highest since January 23, challenging the 2023 peak close of $81.69. That level should be watched because it’s been tough resistance so far this year. The recent crude rally from around $73 in late February may be seasonal or could reflect reopening demand from China. It’s helped front-month futures break through a downward trendline on the charts. Crude hasn’t closed above $82 since mid-November. A push above that could potentially churn up short covering, setting the stage for more gains.

CHART OF THE DAY:  SEPARATE WAYS. While WTI crude (/CL—purple line) tests 2023 highs, natural gas (/NG—candlesticks) got upended Monday on forecasts for warmer U.S. weather later this month. It fell 15% to seven-week lows, a dramatic plunge that reminds us why /NG is sometimes referred to by futures traders as the “widow maker.” Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

How high can they go? There’s little doubt the FOMC will raise its rate projections in the new dot-plot due March 22—at least judging from hawkish Fed speeches over the last month. Just how high is uncertain, with the terminal, or peak, level set between 5% and 5.25% last December. The market currently builds in a peak rate of near 5.4%, but Fed Governor Christopher Waller said last week if data remain hot, the range may have to rise above 5.1% to 5.4%. The current fed funds range is between 4.5% to 4.75%. While Waller didn’t say it, even 6% may not be out of the question, and it certainly wouldn’t be unprecedented. The last time the Fed set rates at 6% or above was in early 2001, right around the time the dot-com boom began to unwind. Just FYI, not a single FOMC official surveyed in the last dot-plot saw rates rising to 6% or above. The highest projections were 5.5% to 5.75%, which sounded awfully elevated at the time.

Job search: Tomorrow morning’s January Job Openings and Labor Turnover Survey (JOLTS) report kicks off a week of key labor market data. Bullish investors would likely welcome a pullback in the number of openings, which have been sky-high for many months and topped 11 million in December. By comparison, job openings typically were in the 6 million range pre-pandemic. Fed officials have often said lower job openings—if they come—could indicate a cooler labor market, perhaps easing wage pressure. This Friday’s February Nonfarm Payrolls report is expected to show flat hourly earnings growth, and that’s the important inflation component of that data. Another reason the job market may not be cooling is because of the severance packages handed out to employees recently laid off by info tech companies. Those severance packages may have to roll off before people can file for unemployment, something that could take a couple of months. We’ll preview expectations for Friday’s February employment report tomorrow.

Retail investors speak:The February TD Ameritrade Investor Movement Index (IMX) showed retail investors returning as net buyers. Some popular names among the investors tracked included Tesla (TSLA), Alphabet (GOOGL), Microsoft (MSFT), and 3M (MMM). The IMX is a proprietary, behavior-based index designed to indicate the sentiment of individual investors’ portfolios. February showed retail investors embracing more risk, a positive sign that there’s potential for a solid base to form near current levels in the major stock indexes. Two big things appear to be driving investors: How high the Fed’s going to raise rates and whether there’s going to be a 2023 recession. There’s also growing interest in fixed income, especially with investment-grade corporate bonds frequently offering yields as high as 6% to 7%. In addition, retail traders are dipping into the front end of the Treasury yield curve.

Calendar

March 8: January JOLTS Job Openings, ADP Employment, Fed Beige Book, and expected earnings from Campbell Soup (CPB)

March 9: Initial and Continuing Jobless Claims and expected earnings from JD.com (JD) and Oracle (ORCL)

March 10: February Nonfarm Payrolls

March 13: No major data or earnings

March 14: February Consumer Price Index (CPI) and Core CPI

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