What Surprises Could US Stocks Encounter Next Week?

Inflation, rising rates and the Federal Reserve could lash US stocks next week. After a sharp jump in bond yields with the new year, rising rates could again impose a different tone on the stocks next week.

Powell and Brainard’s Testimony
Big events, for newt week, include testimony by Federal Reserve Chairman Jerome Powell is slated to testify Tuesday at his nomination hearing before a Senate panel, while the hearing on Fed Governor Lael Brainard’s nomination to the post of vice chair is set for Thursday.

Powell’s hearing on Tuesday will be a highlight of the coming week, not because he is expected to make news, but because he is likely to echo the tone of the Fed minutes, released this past Wednesday.

The central bank revealed in those minutes that officials are also discussing when to start shrinking its nearly $9 trillion balance sheet. The Fed has already forecast tightening policy with three quarter-point interest rate hikes this year, and downsizing its bond holdings would tighten it even further.

Earnings
The week also marks the beginning of the fourth-quarter earnings season, with big banks Citigroup, Wells Fargo and JPMorgan Chase releasing their earnings on Friday.

The bond market could again set the tone for the week ahead, after rapidly rising interest rates gave stocks a hesitant start to the new year. Next week, key inflation reports are expected,

The week also marks the start of the fourth-quarter earnings period with reports from major banks JPMorgan Chase, Citigroup and Wells Fargo on Friday.

Inflation and the Fed continue to be the theme next week, market observers do not believe any earnings results to sink. It is expected to be a good quarter and a good year for earnings, which is why investors are generally feeling positive as far as prospect for earnings is concerned.

The markets will focus predominantly on the Powell and Brainard hearings, the consumer price index on Wednesday and the producer price index the next day.

Stocks had a rough first week to 2022, as bond yields surged on both high expectations for Fed interest rate hikes and the view that the omicron variant of Covid’s peak within weeks. Yields move higher when bonds sell off.

Tech shares were particularly hard hit, with the Nasdaq Composite down more than 4% for the week, and the Dow basically flat. The Technology Select Sector SPDR Fund was off 4.2% as of Friday afternoon. But banks moved higher on the prospect that rising interest rates would help earnings. The Financial Select Sector SPDR Fund was up more than 5%.

This week was a wake-up call for what financial markets will have to deal with in 2022; namely: lower returns and more risk saying” Welcome to the new year”.

Impact of Yields

Yields rose rapidly across the curve, but the dramatic move of the benchmark 10-year was particularly rattling for investors. The 10-year, which influences mortgages and other loans, rose from 1.51% in the final hour of 2021 trading to as high as 1.80% Friday.

That makes it the second-biggest move in the yield for the first week of the year in 20 years, according to Wells Fargo.

Bond investors also reacted to the disappointing December jobs report Friday by sending interest rates higher. There were just 199,000 jobs created last month, less than half of what was expected. But the unemployment rate fell more than expected, to 3.9% from 4.2%. Average hourly wages rose by 0.6%, or 4.7% year over year.

The Inflation Question
Inflation will stay front and center with the CPI and PPI reports. Economists expect another hot month for both readings, though some economists believe inflation is close to its peak. November’s headline CPI of 6.8% was the highest since 1982.

Stock investors will also continue to watch yields. Tech and growth stocks are the most sensitive to rising rates because investors pay for the promise of future earnings. Higher rates mean the cost of money increases and that changes the calculus on their investments.