Markets Falter Ahead of Pivotal Week With Fed Set to Raise Rates Aggressively | Economy

Following the worst week since the lows of March 2020, when the coronavirus struck, stock futures are pointing to another week of woe on Wall Street Monday morning in advance of what will be a pivotal week for markets and the economy.

Dow Jones Industrial Futures were down 19 points in premarket trading after a 939-point tumble Friday. The Nasdaq 100 futures were off by 47 points after the tech-heavy index suffered its worst week since 2008.

There will be a wall of worry, as market seers like to say, for stocks to climb as the Federal Reserve’s monetary policy committee meets for two days starting Tuesday. Members are widely expected to raise interest rates by 50 basis points while also detailing plans to reduce the central bank’s balance sheet, which swelled to $9 trillion during the pandemic. The announcement will come early Wednesday afternoon.

Then there will be a variety of readings on the health of the labor market, culminating Friday in the monthly jobs report for April. Expectations are for a gain of about 390,000 new jobs. Scattered in between will be a host of other data measuring the health of an economy that has begun to slow down markedly from the rapid pace it grew at during the fourth quarter.

Analysts say the markets have entered a long-awaited re-evaluation as the reality has set in that the Fed is likely to be less supportive of stocks and other assets going forward as the economy weans itself off the extraordinary stimulus the Fed and Congress provided to counter the economic effects of the pandemic.

“The theme of our current market rout centers around valuations,” said David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm. “First it was the Covid/work from home stocks that were hit and now the valuation gods are coming for mega-cap FAANG stocks,” he added, referring to megatech stocks like Facebook, Apple and Google.

“The law of valuations combined with the reality of tighter Federal Reserve policy is throwing cold water on stocks that were way too overvalued,” Bahnsen said. “Valuations always come back to reality eventually, and one can never know the timing and sometimes the formation of a top can take longer than even the skeptics expect, but it is starting to feel very much like this is the moment when the market has had enough with stocks that were trading at excessive valuations.”

The Fed is expected to double the amount of interest rate hikes compared to its move in March but observers will be looking for guidance on how fast the Fed begins to reduce its holdings of Treasurys and other securities. Already, the bond market has reacted, pushing the yield on the 10-year Treasury to nearly 3%. Other rates, including those on mortgages, have trended sharply higher.

All of this is designed to put a brake on consumer prices now running at an annual rate of above 8%. While the Fed pays more attention to another measure, the personal consumption expenditures price index, that too is running well above where Fed officials want.

On Friday, the index showed prices excluding often volatile food and energy costs rose 5.2% annually in March, reflecting how difficult the task ahead will be for the Fed given the added uncertainty of the war in Ukraine.

“The Fed will hope that front loaded tightening helps bring inflation more quickly under control and prevents any drift higher in inflation expectations, which might prevent them having to push even more aggressively on the brakes further out, which would have obvious risks to the cycle,” said James McCann, Senior Global Economist at abrdn.

“However, there is a risk from moving quickly too,” he added. “Rising rates impact the economy with lags, which could make it hard to decipher in real time how this adjustment is affecting the economy. The Fed could tighten policy too aggressively, perhaps by pushing rates well above neutral, which could trigger a downturn.”

There have been glimpses of hope recently that some aspects of the current inflation may be ebbing. Used car prices have come down and even housing prices have slowed slightly though they remain elevated.

And Emsi Burning Glass, a data analytics firm that focuses on the labor market, says it sees signs that wage growth may be moderating, at least for some of the hottest occupations. This includes warehousing, child care and other jobs where demand has outstripped supply throughout the past two years.

“This could be an early sign that labor demand in these fields is starting to cool off, particularly after GDP declined in the first quarter,” said Emsi Burning Glass Chief Economist Bledi Taska. “Or it could mean that employers have decided raising wages isn’t going to solve the fundamental worker-shortage problem, and they need to look for new solutions.”