(Bloomberg) — Stocks climbed after Jerome Powell reassured investors that the Federal Reserve is going to tamp down inflation as the economy rebounds, while signaling the central bank will likely start shrinking its balance sheet in 2022.
The S&P 500 rebounded from a five-day slide, while the Nasdaq 100 outperformed major benchmarks and dollar fell. The Fed chief told the Senate Banking Committee that officials won’t hesitate to act if needed to contain price pressures. “If we have to raise interest rates more over time, we will,” he noted. Noting that the U.S. economy was in a much stronger position than the last time the central bank shrank its balance sheet, Powell said no decisions had been made, but it would be quicker this time around.
“I’ve referred to Powell before as Goldilocks in a suit, and to a certain extent, I think he played that role once again today,” said Steve Sosnick, chief strategist at Interactive Brokers. “While he made the right noises about constraining the balance sheet and fighting inflation, he was very careful to balance that out with a general tone that indicated ultimately, ‘Yes I’m concerned about the market reaction to all of these plans that we have.’ And one of the things he has demonstrated in his term is he’s been very reluctant to let any aspect of markets softer inordinately.”
The drumbeat for the Fed to implement four quarter-point hikes this year is growing — and with the speed that markets have been moving, there’s a possibility that traders may soon look to protect themselves against the risk of even faster tightening. Cleveland Fed President Loretta Mester and her Atlanta counterpart Raphael Bostic backed raising rates as soon as March, while Kansas City Fed chief Esther George said she favors reducing the Fed’s balance sheet early on during the process of normalizing policy.
In corporate news, CVS Health Corp. said its full-year adjusted earnings for 2021 would be in a higher range than currently expected by analysts. American Airlines Group Inc. will report higher revenue in the fourth quarter than analysts expected as the carrier’s main operations escaped the worst of winter holiday cancellations. International Business Machines Corp. was downgraded to sell at UBS.
Unfazed by the stock market’s bumpy start to the year, strategists from Goldman Sachs Group Inc. to UBS Global Wealth Management reiterated their bullish calls on bets that equities can weather higher rates and rising bond yields.
“The selloff in some long-duration, high-quality names might be overdone soon,” wrote Goldman strategists led by Cecilia Mariotti. With real yields not expected to move much higher, “valuations are unlikely to become a binding constraint for equities.”
Here are some key events this week:
- EIA crude oil inventory report on Wednesday.
- China PPI, CPI on Wednesday.
- U.S. CPI, Fed Beige Book on Wednesday.
- U.S. initial jobless claims, PPI on Thursday.
- U.S. Senate Banking Committee hearing for Lael Brainard, nominated as Fed vice-chair on Thursday.
- Richmond Fed President Thomas Barkin, Philadelphia Fed President Patrick Harker,
- Chicago Fed President Charles Evans speak on Thursday.
- Bank of Korea policy decision and briefing on Friday.
- Wells Fargo, Citigroup, JPMorgan due to report earnings on Friday.
- U.S. business inventories, industrial production, University of Michigan consumer sentiment, retail sales on Friday.
- New York Fed President John Williams speaks Friday.
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.6% as of 2 p.m. New York time
- The Nasdaq 100 rose 1.3%
- The Dow Jones Industrial Average rose 0.3%
- The MSCI World index rose 0.8%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.4% to $1.1367
- The British pound rose 0.3% to $1.3623
- The Japanese yen fell 0.1% to 115.37 per dollar
Bonds
- The yield on 10-year Treasuries declined one basis point to 1.75%
- Germany’s 10-year yield was little changed at -0.03%
- Britain’s 10-year yield declined two basis points to 1.17%
Commodities
- West Texas Intermediate crude rose 3.6% to $81.06 a barrel
- Gold futures rose 1.2% to $1,819.80 an ounce
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