What’s next for the stock market as the Federal Reserve moves towards ‘peak hockey’?

Investors will see another level of US inflation next week after the stock market stumbled as the Federal Reserve raises its bad tone and says big interest rate hikes are coming to curb the warmer economy.

James Soloway, SEI Investments’ chief market strategist and senior portfolio manager, said in a telephone interview, “We are now seeing extreme maturity.” “It is no secret that the central bank is behind the curve here, with inflation soaring and so far only 25 basis points rising under their belt.”

Central Bank President Jerome Powell said during a panel discussion by the International Monetary Fund in Washington on April 21 that the central bank did not “calculate” that inflation had peaked in March. “It simply came to our notice then Still moving a little fasterPowell said he would put the 50-point rate hike “on the table” for a central bank meeting early next month, opening the door to more moves in the coming months.

U.S. stocks fell sharply after his comments and three key criteria Extended losses on FridayThe Dow Jones Industrial Average has recorded its biggest daily percentage decline since late October 2020. Steven Violin, FLPutnam Investment Management Co-portfolio Manager, says investors are struggling with “very strong forces” in the market.

“The biggest economic momentum since recovering from the epidemic has been met with a very rapid shift in monetary policy,” Violin said by phone. “The markets are struggling just like we all are to understand how it’s going to play out. I do not know if anyone really knows the answer.

The central bank seeks to create a soft landing for the US economy, aiming to tighten monetary policy to combat the sharp rise in inflation for nearly four decades without triggering a recession.

Osterweis Capital Management portfolio managers Eddy Vataru, John Sheehan and Daniel Oh wrote: Their Second quarter view To fund the company’s total revenue.

Osterweis portfolio managers wrote that the Fed could raise the target feed rate to cool the economy, raise long-term maturity rates and reduce inflation, but that “unfortunately, a certain amount of sophistication is needed to implement the double-digit tight plan.”

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They also expressed concern about the contraction of the Treasury yield curve, The latest reversal, Short-term yields are higher than long-term yields, which he calls “rare for this stage of the tightening cycle”. This reflects “a policy error” in their view, which they described as “leaving rates too low for too long and then too late, and probably too much hiking”.

The central bank raised its benchmark interest rate for the first time since 2018 last month, raising it by 25 basis points from close to zero. The central bank is now pushing for its rate hike to pre-load with a big increase.

“There’s something about the idea of ​​front-end loading,” Powell said during a group discussion on April 21. James Bullard, chairman of the Federal Reserve Bank of St. Louis, said on April 18 that he could not reject a rule. 75 base points big hikeAlthough that was not his basic case, The Wall Street Journal reported.

Step: Fed fund futures traders see 75 basis points 94% chance of Fed rise in June, CME data shows

“The federal is going to move by 50 basis points in May,” he said, adding that the stock market is “a little harder to digest” and a half-point increase is likely in June and July. Saglimbene, Global Marketing Specialist, Ameriprise Financial, in a telephone interview.

Dow DJIA,
-2.82%
And S&P 500 SPX,
-2.77%
Each fell nearly 3.0% on Friday, while the Nasdaq Joint COMP,
-2.55%
According to Dow Jones Market data, the stock is down 2.5%. All three key criteria ended the week with losses. The Dow fell for the fourth week in a row, while the S&P 500 and Nasdaq each fell for the third week in a row.

According to Soklimpen, the market is resetting the idea that we are going to go to a much faster normal NFF rate than we thought a month ago.

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“If it’s the climax hawk, and they push offset too hard,” the violinist said, “they may buy themselves more flexibility later in the year as they begin to see the impact of returning to neutral very quickly.”

Saglimbene says the central bank’s rapid interest rate hike could bring the federal funds rate to a “neutral” target of 2.25% to 2.5% by the end of 2022, sooner than investors’ estimates. The rate, now in the range of 0.25% to 0.5%, is considered “neutral” when it does not stimulate or control economic activity, he said.

Meanwhile, according to Violin, investors are worried about the central bank lowering its approximate $ 9 trillion balance sheet under its tight-knit plan. The central bank is targeting a sharp reduction compared to its last attempt. In 2018 the markets revolved. The stock market plummeted Around that year Christmas.

“The current concern is, we’re going to get to the same level,” Violin said. When lowering the balance sheet, ask, “How much more?”

As long as the central bank’s monetary policy is controlled and economic growth slows “more materially,” investors can often expect the austerity to “pass,” Sacklimpen said.

SEI’s Sloway said inflation was not a problem when the central bank last tried to reduce its balance sheet. Now they are “watching” high inflation and “they know they need to tighten things up.”

Step: US inflation rises to 8.5%, CPI shows, high gas prices depreciate consumers

In this context, Luke Dilli, chief economist at the Wilmington Foundation, said in a telephone interview that the central bank was “deserving and necessary” to fight the rising cost of living in the United States. But Delhi said it expects inflation to ease in the second half of the year, and that the central bank should slow down its rate hikes “after doing that pre-loading.”

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According to Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, the market “may have outperformed itself in terms of expectations for the Fed to tighten this year”. He said over the phone that the combination of the central bank’s hiking and austerity measures could “tighten market financial conditions” until the central bank is able to raise interest rates to market levels by 2022.

Investors will be closely watching the March inflation data measured by the Individual-Consumption-Expense Price Index next week. Solloway expects the US government inflation data released by the US government on April 29 to show a rise in the cost of living, as “energy and food prices are rising sharply.”

Next week Economic calendar Includes data on US home prices, new home sales, consumer sentiment and consumer spending.

Ameriprise’s Saglimbene said next week it would keep an eye on “consumer-facing” and quarterly corporate earnings reports from Megacop technology companies. “They will be very important,” he said, adding that Apple Inc. AAPL,
-2.78%,
Meta Platforms Inc. FB,
-2.11%,
PepsiCo Inc. PEP,
-1.54%,
Coca Cola Coca.
-1.45%,
Microsoft Corp. MSFT,
-2.41%,
General Motors Co. GM,
-2.14%
And Google parent Alphabet Inc. GOOGL,
-4.15%
For example.

Step: Investors have attracted $ 17.5 billion from global stocks. The Bank of America says they are just starting out.

Meanwhile, FLPutnam’s violinist said, “It is very convenient to invest fully in the stock market.” He cited the low risk of a recession, but said he would prefer companies with “here and now” cash flow rather than growth-oriented businesses with expected returns in the future. Violin also said it wants companies that are willing to take advantage of higher commodity prices.

The SEI’s Sloway warned, “We are entering a very volatile time. We need to be a little more careful about how much risk we take.”

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