What’s unnerving stocks as Fed heads for rate hikes: Morning Brief

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Tuesday, January 25, 2021

Fears of policy error outweigh fourth quarter results

Remember those “landmines” that the Morning Brief recently warned could explode in 2022? One of them is a few days away from departure, and at the worst possible time.

The sky-high volatility that has been strangling investors since the new year peaked on Monday by briefly dragging the S&P 500 index into correction territory. The see-saw price action, consistent with a “fire and ice tale” coined by the wise men at Morgan Stanley, ended with Wall Street recouping those losses to close in the green. Time to breathe a sigh of relief, then?

Not enough. A less than impressive earnings season – which began “with a whimper at best” as Brian Sozzi of Yahoo Finance so eloquently put it on Monday – is about to fade into the background at the Reserve policy meeting. federal on Wednesday. The central bank is widely expected to start laying the groundwork for a series of interest rate hikes that it hopes will bring the price spike created by excess liquidity under control and the high demand.

“For much of the past decade, market volatility was dampened by the idea that the Federal Reserve and other global central banks were ready to step in to support the economy in the face of weakness, exogenous shocks or from an unexpected tightening of global financial conditions,” wrote Mark Haefele, CIO of Global Wealth Management at UBS.

“Today, with inflation still high, that support seems less certain, and this week’s Fed meeting should underscore the Fed’s shift in policy priorities away from supporting growth and toward tackling the crisis. inflation,” he added.

And therein lies the problem. The subtext of the rout in tech stocks reflects market fears that a policy mistake could drive rates too high, too quickly.

“I would be very [reluctant] consider entering or adding positions to anything until we hear of an increasingly belligerent Fed on Wednesday,” Strategic Funds managing director Marc LoPresti told Yahoo on Monday. finance.

Rate hikes — which translate into higher borrowing costs for consumers and businesses — are particularly anathema to high-flying tech stocks like Tesla (TSLA) and Amazon (AMZN), which were hit Monday at a new low of 52 weeks. It’s what LoPresti called a “plethora of pain” piling up for investors.

Tech stocks, which hit correction territory last week, have become a leading indicator of investor concerns that the Fed may overcorrect its ultra-loose monetary policy – ​​and perhaps not too soon. As inflation eats away at consumers’ purchasing power, the easy money imperatives of COVID-19 are giving way to the need to combat price pressures.

“I’m extremely worried about much higher interest rates, not because the Fed is going to move them there, but people will realize that they have to borrow money and go into debt to keep up with the crisis. inflation. And so I think the Fed will lose control,” Interactive Brokers (IBKR) chairman Thomas Peterffy told Yahoo Finance last week.

Some investors, like Katie Nixon, IT Director of Northern Trust Wealth Management, believes Omicron could contain the Fed’s more hawkish impulses.

Still, she acknowledges that the consequences of an aggressive policy change “would lead to turbulence in financial markets and then trickle down to the real economy, increasing the risk of recession. The Federal Reserve is acutely aware of this risk and will be extremely cautious in pursuing policy that could cut short the recovery and undermine the goal of inclusive full employment,” Nixon added.

Given that benchmark rates will always remain below the rate of inflation, currently at 7%, veteran market strategist Louis Navellier thinks the market’s fear of higher rates is “ridiculous”.

Still, the analyst noted that, in order to “break the back of inflation, the Fed needs to engineer a ‘soft landing,’ which is easier said than done.” Moreover, rising rates will simultaneously increase the interest rate burden on the federal debt, which currently stands at nearly $30 trillion, Navellier added.

This latest suggestion, an idea the Morning Brief recently addressed, is at the heart of a warning issued by the UK-based Jubilee Debt Campaign. Higher interest rates could trigger a global debt crisis, especially for developing markets, CNBC reported Monday..

In short, the Fed is walking a tightrope that straddles inflation, bloated government balance sheets, and a pandemic-hit economy. And the outcome will determine whether a market pampered by central bank liquidity can continue to rally.

Through Javier E.David, editor at Yahoo finance. Follow him on @Teflongeek

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What to watch today

Economy

  • 9:00 a.m. ET: FHFA House Price Index, month-over-month, November (1.0% expected, 1.1% in October)

  • 9:00 a.m. ET: S&P CoreLogic Case-Shiller 20 City Composite Index, month-over-month, November (0.93% expected, 0.92% in October)

  • 9:00 a.m. ET: S&P CoreLogic Case-Shiller 20 City Composite Index, YoY, November (18.00% expected, 18.41% in October)

  • 10:00 a.m. ET: Conference Board Consumer Confidence, January (111.1 expected, 115.8 in December)

  • 10:00 a.m. ET: Richmond Fed Manufacturing Index, January (14 planned, 16 in December)

Earnings

Pre-marketing

  • 6:45 a.m. ET: Johnson & Johnson (JNJ) expected to report adjusted earnings of $2.12 per share on revenue of $25.32 billion

  • 7:00 a.m. ET: American Express (AXP) expected to report adjusted earnings of $1.83 per share on revenue of $11.50 billion

  • 7:00 a.m. ET: Verizon (VZ) expected to report adjusted earnings of $1.28 per share on revenue of $34.03 billion

  • 7:00 a.m. ET: Invesco (IVZ) expected to report adjusted earnings of $0.75 per share on revenue of $1.77 billion

  • General Electric (GE) expected to report adjusted earnings of $0.84 per share on revenue of $21.38 billion

  • Polaris (PII) is expected to report adjusted earnings of $2.03 per share on revenue of $2.13 billion

  • Raytheon Technologies (RTX) expected to report adjusted earnings of $1.02 per share on revenue of $17.28 billion

  • 3M (MMM) expected to report adjusted earnings of $2.01 per share on revenue of $8.60 billion

  • Lockheed Martin (LMT) expected to report adjusted earnings of $7.17 per share on revenue of $17.66 billion

Post-marketing

  • Microsoft (MSFT) expected to report adjusted earnings of $2.32 per share on revenue of $50.87 billion

  • 4:05 p.m. ET: Capital One Financial Corp. (COF) after market close expected to report adjusted earnings of $5.29 per share on revenue of $7.93 billion

Politics

  • Health care is the focus Families USA Health Action Conference 2022 with a virtual appearance of President Joe Biden along with other political leaders this week, including Speaker of the United States House of Representatives Nancy Pelosi.

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