Big bank profits and a hot inflation report could sway markets over the short holiday week

A trader on the NYSE, March 11, 2022.

Source: NYSE

Markets face what could be a searing inflation report in the coming week and a batch of big bank earnings to start earnings season.

JPMorgan Chase and BlackRock kick off the financial sector’s first-quarter earnings release on Wednesday, with Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs reporting on Thursday.

The war in Ukraine will remain in focus as investors look for any signs of a change in the crisis.

Quincy Krosby, chief equity strategist at LPL Financial, said first-quarter earnings reports from the financial sector will be important for a market given the impact of the Federal Reserve’s plans to raise interest rates. interest and aggressively tighten policy.

“We want to get a sense of how they see the Fed’s plan…quantitative tightening, liquidity drain, coupled with higher rates, affecting their customers and their business units,” Krosby said. “If you look at the XLF [Financial Select Sector SPDR Fund ETF], the days when it goes up, it’s the insurance because they increase the premiums. Higher rates are good for the banks, until the belief is that higher rates hurt the economy.”

For the week, the Dow Jones Industrial Average was down 0.3%, but the interest rate-sensitive Nasdaq Composite was down 3.9% and the S&P 500 was down 1.3%. For a third week in a month, the 10-year Treasury yield jumped above 30 basis points, according to Wells Fargo’s Michael Schumacher. One basis point equals 0.01%.

The 10-year rose above 2.7% on Friday.

“He’s been on kerosene,” Schumacher said. He said the 10-year yield, which moves opposite to price, was boosted last week by the Fed’s signal that it plans to cut its balance sheet by $95 billion a month, of which about $60 billion. billions of dollars will be in treasury bills.

The 10 year is important as a benchmark and also because it is a rate that affects mortgages and other loans.

“People say the balance sheet is going to shake the 10s a bit,” Schumacher said. He said he couldn’t rule out a move in the yield to 3%, given how quickly the yield has moved recently.

The economic data for the coming week could be a catalyst for another move higher.

The four-day holiday week is filled with economic reports. Some will come out on the Good Friday market holiday. The highlight is Tuesday’s March Consumer Price Index report, which is expected to top the 7.9% reported for February.

“That’s big. That’s the last key data point before the Fed meeting on May 3,” Schumacher said. A hot number, even in line with expectations, will encourage the market to expect a 50 basis point, or half a percent, hike from the Fed at this meeting. The Fed began its rate hike cycle in March with a quarter-point hike.

The producer price index is due out on Wednesday. Data on retail sales and consumer sentiment are due Thursday. On the Friday market holiday, Empire State manufacturing and industrial production are released.

Barclays economists expect the CPI rose 1.24% in March, gaining 8.5% year-on-year, the highest in 40 years. “We expect the annual CPI rate to peak in March and decline thereafter, helped by positive base effects,” the economists wrote.

The Fed’s preferred measure of inflation, the personal consumption expenditure deflator, is released on April 29, but the CPI and PPI will both set the tone for this report.

“We’ve had such a run in yields. The sentiment is so dour on rates, I wouldn’t be surprised if we got some rate relief after seeing the March CPI,” said Peter Boockvar, Chief Investment Officer at Bleakley. Advisory group.

“Although inflationary pressures are still present, I think March would be the peak inflation rate based on a rate of change… You might get some rotation [in stocks] next week if you get a bond bounce,” Boockvar said.

Schumacher said the bond market will also be watching the Bank of Canada for an expected rate hike at its Wednesday meeting, and the European Central Bank for comments on its bond purchases at its Thursday meeting.

Profit Season

According to Refinitiv, S&P 500 earnings are expected to rise 6.1% in the first quarter, but the financial sector is expected to see a decline of 22.9%.

LPL’s Krosby expects to see jerky exchanges. “I think it’s going to be a tough quarter,” she said. She said investors will watch how the market absorbs a 50 basis point rise. Quantitative tightening, balance sheet reductions known as QTs, is also political tightening.

“The QT could start next month. There is a sense [the Fed] can’t wait any longer,” she said.

Krosby said she recommends a defensive approach, favoring consumer staples, real estate investment trusts and healthcare, as well as consumer discretionary names that emphasize cost savings for consumers. .

“I suspect at the end of next week, with the long weekend coming up, people will want to take the risk down, but I suspect it could be quite a rough ride with CPI before we see that,” said Schumacher.

Calendar for the coming week

Monday

9:30 a.m. Fed Governor Michelle Bowman, Fed Governor Christopher Waller at the “Fed Listens” event

9:30 a.m. Raphael Bostic, Atlanta Fed President

12:45 p.m. Chicago Fed President Charles Evans

1:00 p.m. Auction of $46 billion 3-year notes

Tuesday

Earnings: Albertson, Carmax

6:00 a.m. NFIB Small Business Survey

8:30 CPI

12:10 p.m. Fed Governor Lael Brainard at the Wall Street Journal Jobs Summit

1:00 p.m. $34 billion 10-year bond auction

2:00 p.m. Federal budget

6:45 p.m. Tom Barkin, Richmond Fed President

Wednesday

Earnings: JPMorgan, BlackRock, Delta Air Lines, Bed Bath & Beyond, Rent the Runway, Fastenal, Infosys, First Republic Bank

8:30 PPI

1:00 p.m. 30-year bond auction

Thusday

Earnings: Goldman Sachs, Citigroup, Wells Fargo, Morgan Stanley, US Bancorp, UnitedHealth, PNC Financial, Rite Aid, Ally Financial, State Street

8:30 a.m. Initial Claims

8:30 a.m. Retail

8:30 a.m. Import prices

10:00 a.m. Consumer Sentiment

10:00 a.m. Business inventories

2:00 p.m. early closing for the bond market

3:50 p.m. Cleveland Fed President Loretta Mester

6:00 p.m. Patrick Harker, President of the Philadelphia Fed

Friday

Markets are closed for the Good Friday holiday

8:30 a.m. Empire State making

9:15 a.m. Industrial production

4:00 p.m. ICT data

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