Fed could be a catalyst for bonds and could lead to stock growth next week

Bonds could be volatile next week. If yields increase, this could make it difficult to get traction in high-tech stocks and other growth stocks.

Rising bond yields have led to rising stocks. Names like Apple, Tesla and Amazon have lagged behind as investors move into cyclical groups that are doing well in an economic recovery. Even so, the S&P 500 and Dow both closed at record highs on Friday, while the Nasdaq Composite was lower.

Nasdaq, which hosts high-tech, gained 3% in the last week, but fell 5.5% in the last month.

Next week’s bond market is likely to pick up from the Federal Reserve, which meets on Tuesday and Wednesday.

The central bank is expected to nod much better growth. Bond professionals are also looking at whether Fed officials will change their interest rate outlook, which now does not include any rate hikes until 2023.

“Markets have far too high expectations of what the Fed will do or say,” said Gregory Peters, head of multisectoral and strategy at PGIM Fixed Income. “I think the message will be consistent.”

He said Fed Chairman Jerome Powell is likely to look inappropriate and is unlikely to grant deadlines for the central bank to change its bond-buying program or other policy.

Bond yields, which oppose the price, have risen on an improved outlook for the economy.

That trade also appeared on the stock market, with the Dow up 4% for the week ending Friday, with a record 32,778. Consumer discretionary actions, which include retail, were among the best performing, up 5.7%, fueled by optimism that individuals will spend $ 1,400 on incentive checks.

Yields were higher on Friday, after President Joe Biden said all adults would be eligible for a vaccine by May 1. The 10-year return of the Treasury reached a maximum of 1.642% – the highest level in more than a year.

It is the key rate to watch as it affects mortgages and other consumer and business loans.

“The economy will be incredibly strong this year – deficit spending, reopening, vaccines,” Peters told PGIM.

“It looks like for next year, all the numbers will be revised higher,” he said. “So this could have sustainable growth, so I think there will be pressure on rates that will increase.”

Bond yields have risen sharply in the last month. The fast pace of the move made the shares nervous as investors adjust to higher rates. The 10-year Treasury yield was 1.16% on February 12.

In the last month, energy stocks rose by almost 20%, financial stocks rose by 10.2%, and industry rose by 7%. The S&P technology sector fell 5.4% in the last month, and communications services, which include internet names, rose 0.8%.

Higher rates are a challenge for technology stocks and other growth stocks, as those stocks are expensive and have a high price-to-earnings ratio.

“When rates are very low, valuations don’t matter to people,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.

“If the rates are low, there is no penalty,” he said. “If rates start to rise, people are becoming more sensitive to valuations, and that’s what we’ve seen here.”

Scott Redler, partner with T3live.com, tracks short-term techniques in the stock market and trades many of the growing stocks. However, lately, he has found himself sitting in many valuable and cyclical names.

“My name is Visa, GM, Ford, Macy’s, 3M. These were my biggest winners this week,” he said. “It was very difficult to make money in Apple, Facebook and Tesla.”

The Nasdaq was hardest hit by rising interest rates. Apple is down 0.3% in the last week, but down 10.6% in the last month. The S&P 500 ended with a record 3,943 and rose 2.6% in the last week, but is flat in the last month, with only 0.2%.

“Rate volatility could cause another turning point in technology,” Redler said. “Last week, technology reached its level of reaction, and that’s it [past] this week had an excessive comeback. The question is, “Was that it?” “

“Next Wednesday, Powell could be the determining factor,” he said. “Rates have made higher highs, and technology is far from last Friday’s lows, so maybe the market is getting more comfortable.”

Apple’s establishment is unusual for bell-tower technicians. It helped market gains last year.

“Watch Apple because it’s a little bit of everything. Apple is growing, technology, retail. If something goes well, it should be Apple,” Redler said.

There are some important data for next week, including February retail sales and industrial production, both Tuesdays. There is also a $ 20 billion 20-year treasury bill auction on Tuesday.

The biggest catalyst for the bond market remains the Fed.

The bond market has been speculating on something the Fed may not discuss after its meeting on Wednesday afternoon. In one of its moves to strengthen the economy during the pandemic, the Fed allowed banks to hold treasury bonds without taking them into account with the bank’s leverage ratio. This strategy has allowed institutions to have more flexibility to use their balance sheet for activities such as lending.

The program expires on March 31.

“This is a huge problem, in essence, because you have so many cash offers coming and going. [the rule] in practice, it is extremely punitive for banks to own Treasurys, “Peters said at PGIM.

“Markets are a bit divided on what’s going to happen,” he said. “I think most experts think an extension is the right way. You haven’t heard from the Fed about it.”

Peters expects the Treasury market to remain volatile.

“I think you will see more volatility in a high-pressure growth economy with extremely high deficits and an accommodative Fed,” he said. “I think you’ll see these whippy movements.”

months

8:30 Empire State Manufacturing

16:00 International Treasury Capital Data

Tuesday

Earnings: Volkswagen, design brands, Jabil, Lennar, Coupa Software, CrowdStrike

The Federal Open Markets Committee begins its two-day meeting

8:30 am Retail sales

8:30 Import prices

8:30 Business Leaders Survey

9:15 Industrial production

10:00 am Business Inventory

10:00 am Survey of the National Association of Home Builders

Wednesday

Earnings: Tapes, Lands’ End, Five Below, Herman Miller, American Outdoor Brands

8:30 The house starts

14:00 Fed Statement

14:30 briefing by Fed Chairman Jerome Powell

Thursday

Earnings: FedEx, Dollar General, Nike, Petco, Accenture, Commercial Metals, Logo Jewelry

8:30 am Initial claims

10:00 am Fed Philadelphia Poll