Inflation, rising interest rates and the Fed may stimulate the stock market


As the rapidly rising interest rates cause the stock market to fluctuate at the beginning of the new year, the bond market may once again set a trend for the next week.

In the next week, Key inflation Report It is expected that the chairman of the Federal Reserve Jerome Powell Scheduled to testify on Tuesday His nomination hearing Before the Senate panel, and Fed Governor Lael Brainard (Lael Brainard) Nomination Hearing The position of vice chairman is scheduled for Thursday.


This week also marks the beginning of the fourth quarter earnings period. Major banks’ reports JPMorgan, Citigroup and FuGuo bank on Friday.

Leo Grohowski, Chief Investment Officer of BNY Mellon Wealth Management, said: “Inflation and the Federal Reserve are still the subject of next week, but I do think we are looking forward to some profitable results.” “We do think this will be a good quarter and a good year of profitability. , Which is why we are generally optimistic about profit prospects.”


Grohowski said that the market will mainly focus on Powell and Brainard’s hearings, Wednesday’s consumer price index and the next day’s producer price index.

“I think it is unrealistic to assume that earnings become the first page of the story, and the Fed’s monetary policy becomes the second page of the story,” he said.

By the first week of 2022, the stock market will perform poorly, as bond yields rise due to the high expectations of the Fed’s rate hike and the idea that Covid’s omicron variant will peak in a few weeks. When bonds sell off, yields will go higher.


Technology has been hit particularly hard, Nasdaq The composite index fell 4.5% this week, while Dow There was almost no negative impact, only a decrease of 0.3%.This Technology Select Industry SPDR Fund It was down 4.6% as of Friday afternoon. But banks are moving higher because of the prospect that rising interest rates will help profitability.This Financial Select Industry SPDR Fund This week it rose 5.4%.

This Standard & Poor’s 500 Index This week closed at 4677 points, down 1.9%.

Grokhowski said: “This week is a wake-up call for the 2022 issues we will be dealing with.” “The rewards are lower and the risks are greater. Welcome to the new year.”


Yields have risen rapidly across the curve, but the violent volatility of benchmark 10-year bonds has particularly disturbed investors. The 10-year interest rate affecting mortgages and other loans rose from 1.51% in the last hour of 2021 to 1.80% on Friday.

According to Wells Fargo, this makes it the second largest change in yields in the first week of this year in 20 years.

“This is more dramatic than we expected, and the Fed’s shift to a more hawkish stance is unexpected,” Grohowski said. “Most market participants expect interest rates to be higher and monetary policy to be less accommodative, but when you see the federal funds suggest that the probability of raising interest rates in March is 90%, it is only 63% on New Year’s Eve. The tone happened quite a bit. The changes in the Fed’s meeting minutes this week have picked up, and the market is making adjustments to this.”

Powell’s hearing on Tuesday will be a highlight of next week, not because he is expected to make news, but because he is likely to respond The tone of the minutes of the Fed meeting, Released last Wednesday.

The central bank revealed in the minutes of the meeting that officials are still discussing when to start shrinking its nearly $9 trillion balance sheet. The Fed has predicted that it will adopt a tightening policy of three interest rate hikes of 25 basis points this year, and the reduction in bond holdings will further tighten.

Bond investors are also disappointed Friday December Employment Report By raising interest rates. Only 199,000 jobs were created last month, which is less than half of what was expected. But the unemployment rate fell more than expected, from 4.2% to 3.9%. Average hourly wages increased by 0.6%, or 4.7%, year-on-year.

Economists blamed the weak report in part on the lack of workers to fill jobs, but expect the Fed to raise interest rates anyway.

“This is the Fed saying that we are in full employment. There is still a gap, but wages have soared far beyond anyone’s expectations, and they are mainly concentrated on low-wage jobs,” said Grant Thornton chief economist Diane Swank. “We are about 3.5 million below the previous peak, and the labor market behaves as if we have exceeded full employment.”

Inflation will become the top priority of CPI and PPI reports. Economists expect that both data will be another hot month, although some economists believe that inflation is nearing its peak. Headline CPI for November is 6.8% It is the highest since 1982.

Stock investors will also continue to pay attention to yields. Technology stocks and growth stocks are most sensitive to rising interest rates because investors pay for promises of future earnings. Higher interest rates mean an increase in the cost of funds, which changes their investment calculations.

Grohowski predicts that the 10-year Treasury bond yield will reach 2.25% by the end of this year, although it is moving faster than expected. He said: “In those stocks that last longer, such as technology and the Nasdaq index, the sooner you get there, the more pain.” “I do think that yields have stabilized and technology is back. I am. I think we will see very good gains this year. Technology continues to be the beneficiaries.”

Grohowski said that the market may fall by 10% in 2022, but he suspects that there will be a sharp drop in the short term because there is too much cash waiting to enter the market.

“I think this dry powder will be put into use. I think we have started a difficult start and reset,” he said. “I think that ultimately this expected reset will be a healthy expectation. I do think that after last year’s high returns and low volatility and the doubling of the market, market participants received alarm bells earlier this year. Three years. [But] In the next 12 to 18 months, the sled will be much more difficult. “

There will also be three large-scale Treasury auctions in the coming week, with $52 billion in 3-year bonds on Tuesday, $36 billion in 10-year bonds on Wednesday, and $22 billion in 30-year bonds on Thursday.

On Friday, the 10-year Treasury bond yield soared to 1.80%, but it is easy to return to that level next week. This puts it slightly above the 2021 high.

“Around these levels, the market will try to find some short-term support,” said Greg Faranello, head of US interest rates at AmeriVet Securities. He added that the auction may be an event that helps temporarily limit the trend of yields.

One week ahead of calendar

on Monday

income: Commercial metals, honor, Tire

10:00 AM Wholesale trade

Tuesday

income: Albertson

6:00 AM NFIB survey

9:30 am Esther George, Chairman of the Kansas City Federal Reserve Bank

10:00 AM Fed Chairman Jerome Powell’s nomination hearing is held at the Senate Banking, Housing and Urban Affairs Committee

4:00 PM James Brad, Chairman of the St. Louis Federal Reserve Bank

Wednesday

income: Jefferies Financial, Infosys, Knowledge base homepage, Wipro

8:30 am CPI

2:00 p.m. Federal Budget

2:00 p.m. Beige Book

Thursday

income: Delta Airlines, TSMC

8:30 am Initial claim

8:30 a.m.

10:00 AM Fed Governor Lyle Brainard at the Federal Reserve Vice Chair Nomination Hearing held by the Senate Banking, Housing and Urban Affairs Committee

12:00 noon Richmond Federal Reserve Chairman Thomas Barkin

1:00 PM Charles Evans, Chairman of the Chicago Federal Reserve Bank

Friday

income: JPMorgan, Black stone, Citigroup, FuGuo bank

8:30 AM Retail

8:30 am Import price

9:15 am Industrial production

10:00 AM Consumer sentiment

10:00 am Enterprise inventory

11:00 a.m. New York Fed President John Williams

.