Stock market faces crucial test this week: 3 questions that could decide rally’s fate

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There will be no rest for investors this week as they await Federal Reserve Chairman Jerome Powell’s biennial congressional testimony as well as a marquee report on the state of the US labor market.

Further complicating things, investors will also be watching to see how stocks react to more attractive risk-free returns in the bond market after the yield on the 10-year Treasury note last week temporarily rose above the 4% range, Many people hope to climb even further.

Was January’s Jobs Number One ‘Temporary’?
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On the economic data front, the most important question that investors will need to answer is whether the massive job growth in January continued in February. The US economy added 517,000 jobs in January, according to the Labor Department, far exceeding expectations and setting in motion a market reconsidering how high the Federal Reserve will take interest rates in an effort to tame inflation.

Since then, weekly unemployment benefit claims have continued as some Americans file for unemployment benefits, fueling expectations that another blockbuster gain in jobs could be due next Friday for February data, which in turn will be released by the Fed. could force the reserve to resort to even more. The aggressive interest rate increase, according to Steve Sosnik, chief strategist at Interactive Brokers, during a phone call with MarketWatch.

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“Will it turn out that the numbers we got last month were a fluke? Or is it part of a new trend?,” Sosnik said.

Warm weather means stock market investors shouldn’t be looking for a cold February jobs report: Economists

What would Powell say?
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Investors haven’t heard from Powell since he participated in a Q&A at the Economic Club of Washington on February 7.

During his back-and-forth with private-equity billionaire David Rubenstein, Powell reiterated that signs of deflation are emerging, though he acknowledged that the journey back to the Fed’s 2% target will likely be “bumpy.”

Since then, warmer-than-expected inflation reports have shown that a series of easing price pressures may be coming to an end.

According to the consumer-price index released on February 14, the cost of living rose 0.5% in January, the biggest increase in three months. The annual rate of inflation, meanwhile, slowed again to 6.4% from 6.5%, but a bigger decline than economists had expected. January’s producer-price index and the core personal consumption expenditure index, the Fed’s favorite inflation gauge, also came in warmer than expected.

As a result, investors will be listening closely to Powell to see what the Fed chair has to say about the central bank’s efforts to quell inflation when he travels to Capitol Hill on Tuesday to testify before the Senate Banking Committee, then the House. Will testify before Financial Services Committee a day later.

“If the Fed is really up to the data, the latest inflation data is not exactly what the Fed wants to see. So how will Powell dance around that?” Sosnik told MarketWatch in a phone interview.

check out: Powell will talk to Congress about the possibility of more interest rate hikes, not less

How will stocks react to higher yields?

On top of Powell’s economic data and commentary, investors will also be watching to see how higher bond yields will affect equities.

The fact that investors can now earn yields north of 5% by simply buying six-month Treasury bills, according to Kelly Cox, a US investment analyst at eToro, means that the stock now faces major competition from a less risky asset class. are doing.

What’s more, many on Wall Street expect bond yields to continue rising, potentially adding to the pressure facing US equity benchmarks such as the S&P 500 index SPX.
Nasdaq Composite Comp,
and the Dow Jones Industrial Average DJIA,

According to a team of economists at Mizuho Securities, “we expect the rate adjustment is not over”.

The inflation data pushed the 10-year Treasury yield above 4%. How high can interest rates go?

uncertainty abounds

Investors started the year with hopes that the Fed could cut interest rates this fall. However, warmer-than-expected economic data and warnings from Fed officials about more rate hikes softened that outlook.

To wit, moves in fed funds futures suggest that investors see little chance of a rate cut later this year. CME’s Fedwatch Tool, While the fed-funds rate is rising above 5%.

It remains to be seen how far the Fed will raise interest rates. According to Mohannad Aama, portfolio manager at Beam Capital, some are betting that the central bank could eventually raise its policy rate to 6%, or perhaps even higher.

“There’s still a lot of uncertainty,” Ama said.

Because of this, each data point can potentially affect investor expectations for how far rates will move, potentially hitting or boosting stocks, he said.

US stocks suffered in February, with major indexes losing ground and denting their early 2023 rally. Shares rebounded last week, however, as the Dow snapped four consecutive weekly losses and the S&P 500 snapped a three-week losing streak.

The Dow rose 1.8% last week, while the S&P 500 rose 1.9% and the Nasdaq Composite rose 2%.

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