Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.
Markets remained highly volatile last week. Investors, in our view, are still coming to grips with a looming monetary tightening cycle and a more persistent inflation backdrop. The reaction of share prices last week to earnings beats and misses was dramatic, with stocks adding and losing $200bn of market cap in a single day. Additionally, markets are now starting to price a reasonable chance of a 50bps rate rise at the March FOMC meeting. In our view, an acknowledgment that central banks may have to tighten more aggressively than is currently priced into the market is significant.
The Fed’s pivot that began at the December FOMC meeting and gathered steam at Chair Powell’s confirmation testimony last month cleared the way for the looming monetary tightening cycle. The Bank of England has since hiked twice and very nearly approved a sharper 50bps rate hike last week, while the ECB last week pivoted towards potentially pulling forward their monetary tightening plans after restating intentions to the contrary in December. In our view, the tightening cycle is here.
This week, a few Fed officials are scheduled to give speeches; however, most of the focus will likely be on inflation and inflation expectation indicators as we await the NFIB and CPI statistics. With inflation risk creating ongoing uncertainty about just how aggressive the Fed will need to be, expect markets to remain highly volatile.
Data deck for February 5–February 11: