Market Pulse

Market Pulse

January 31, 2022

In focus

Last week’s market activity hinged on the Federal Open Market Committee’s (FOMC) rate decision and Federal Reserve (Fed) Chair Powell’s post-meeting press conference. In our view, the key takeaways included:

  • A March liftoff of the Fed funds rate is a virtual lock; however, we believe the Fed will stick with a 0.25% increase to start.
  • The Fed will use a multi-pronged approach to tighten policy in 2022 by completing the taper, starting rate hikes, and decreasing the central bank’s balance sheet.
  • The Fed emphasized its intention to keep policy flexible as conditions evolve. As Fed Chair Powell touted the underlying strength of the U.S. economy, traders priced in a more hawkish Fed policy outlook in the year ahead.

We believe Fed Chair Powell’s comments around a nimble policy framework were intended to suggest the Fed would not make any action on ‘autopilot.’ Each decision will be evaluated against hiring, growth, and inflation trends. Absent a persistent rise in intermediate and long U.S. yields, the Fed may struggle to deliver on the market’s most hawkish rate hike bets. As it stands today, just 60 basis points (0.60%) separate 2-and 10-year yields. That’s slightly more than the equivalent of two rate hikes. Of course, several rate hikes are already priced into the front end of the curve and longer yields may (and should) rise. But, increasingly hawkish Fed expectations are putting outsized upward pressure on the policy-sensitive yields in the 0-5 year range while anchoring longer yields on the basis of a less accommodative policy outlook. That raises the possibility the Fed will move cautiously in the second half of 2022 with respect to its benchmark rate and look to other policy tools that help encourage higher yields beyond the 5-year range.

A look back

  • Global equities declined -1.1% last week. The S&P 500 gained 0.8%, led by strength in the energy and technology sectors.
  • The U.S. yield curve bear flattened as 10-year U.S. Treasury yields rose two basis points to 1.77%. Meanwhile, 2-year yields spiked 16 basis points to 1.16%, fueled by Fed rate hike speculation.
  • U.S. companies continued their strong earnings streak. One-third of S&P 500 companies released Q4 2021 results. 68% and 77% have reported upside surprises in sales and earnings, respectively.

A look ahead

  • The Senate Banking Committee will hold confirmation hearings for the White House’s three nominees to serve at the Fed.
  • Markets will keep a close eye on discussions between Russia and the West. The U.S. and European Union are discussing possible trade and financial sanctions should military activity escalate.
  • Economic releases: Nonfarm payrolls, ISM & Markit Manufacturing & Services, MBA Mortgage Applications, Durable Goods Orders, and the Unemployment Rate.

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