All Eyes on Fed Next Week as US Stocks Whipsaw amid Banking Crisis

US stocks whipsawed last week amid the banking crisis. Next week, investors would closely watch the Fed meeting as the US central bank faces a balancing act between calming markets and taming inflation.

Looking at the last week, the Dow Jones fell 1.2% on Friday and closed down 0.15% for the week. The 30-share index is now negative for the year and has closed with losses in five of the last six weeks.

The S&P 500 also lost 1.1% on Friday but gained 1.43% for the week. The world’s most popular index has now closed with gains for two weeks which was preceded by four consecutive weeks of losses.

Nasdaq Composite meanwhile outperformed last week and despite losing 0.74% on Friday it ended up 4.41% higher for the week. The tech-heavy index had outperformed in the previous week also where it had gained 2.58%.

Last week we didn’t get many earnings reports. Xpeng Motors released its Q4 2022 earnings on Friday and the stock soared despite missing both topline and bottomline estimates.

The banking crisis kept investors on their toes last week. While US regional banks continued to be volatile and the SPDR S&P Regional Banking ETF fell almost 6% on Friday, the crisis also spread to Europe where Credit Suisse fell to all-time lows. European stocks had their worst week since January as bank stocks crashed.

Meanwhile, the key events last week were inflation and retail sales data.

US February Inflation Was In-line with Jobs Report Shattered Estimates

US CPI (consumer price inflation) rose at an annualized pace of 6% in February and 0.4% on a monthly basis. The reading came in line with estimates.

Previously, the January inflation reading came in hotter than expected, raising fears of a hawkish Fed. High inflation is invariably negative for risk assets like growth stocks. However, some investment strategies can outperform during high inflation.

US retail sales fell 0.4% in February which was worse than expected. However, the jobs report shattered estimates for the second time in a row.

The US economy added 311,000 jobs in February, ahead of the 225,000 that markets were expecting. Also, while the January nonfarm payroll data was revised down it still showed job gains of 504,000 in the month.

The US economy added over 0.8 million jobs in the first two months of the year which is quite strong by historical standards.

The strong jobs report makes things complicated for the Fed as chair Jerome Powell has said multiple times that a strong labor markets make its job of lowering inflation more troublesome.

All Eyes on Fed Next Week

The Fed’s March meeting is scheduled for March 21-22. Market expectations from the meeting have whipsawed over the last fortnight. While a 50-basis point rate hike in March looked a possibility after Powell’s Congressional testimony earlier this week, traders reset their expectations amid the banking crisis.

The CME Fed Watch tool shows that 62% of traders now see a 25-basis point rate hike in March while the remaining 38% bet that Fed won’t raise rates in March.

The chorus for “no March Fed rate hike” has meanwhile gained traction and Moody’s Analytics and Goldman Sachs believe that the Fed won’t raise rates in March.

Bond guru Jeffrey Gundlach meanwhile believes that the Fed should stop raising rates further but admitted that the US central bank might still raise rates by 25 basis points in March as a face-saver exercise.

Notably, the 2-year treasury yield is now down to around 4% and the US yield curve has steepened which Gundlach sees as a sign of an imminent recession.

While recession impacts most sectors of the economy, some investments are largely recession-proof.

Key Earnings and Indicators to Watch Next Week

While the Fed meeting looks like the most important event for the next week, we’ll also get some key earnings and economic data. Nike would be among the most important earnings release next week and markets would scrutinize the results for insights into consumer spending.

We’ll also get home sales data and durable goods orders. Also, the flash PMIs for March would be released next week which will provide insights into how the banking crisis impacted economic activity in the month.

All said, the Fed’s meeting could be the key market driver next week. The US central bank faces a tough balancing act. On the one hand, it needs to calm markets amid the banking crisis.

On the other hand, the Fed is still far away from lowering inflation to its target range of 2%. While Powell said during his Congressional testimony that the Fed was prepared to increase the pace of hikes, he might find his hands tied by the banking crisis.

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