Stocks rallied slightly this morning as bulls looked to close out an otherwise bearish week on a high note. The Dow lifted the S&P while the Nasdaq Composite lagged for a slight loss. In mid-March, the market rebounded fiercely off of new lows.
Many investors expected additional gains in April, a historically strong month for stocks.
But equities hit a rough patch last week after peaking, and thus far, bulls have had little to celebrate. Stocks sunk again last Wednesday after the minutes from the Fed’s March meeting were released. Within the minutes, investors learned that the Fed wants to lean more hawkish than anticipated via $95 billion worth of balance sheet reductions each month starting in May.
This shocked Wall Street and came just one day after the first major bank predicted a recession in the US by 2023. On Tuesday, Deutsche Bank analysts said in a note that “the US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024.”
They continued, adding:
“We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one.”
Fed Gov. Lael Brainard, who was previously considered the most dovish of the Fed governors, went “full hawk” this week, too. She added to Wall Street’s anxiety over the coming shift from QE to QT in a prepared statement made to the Minnesota Fed.
“Currently, inflation is much too high and is subject to upside risks,” Brainard said.
“The [FOMC] is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”
This, like the Deutsche Bank prediction, came before the Fed minutes release.
The silver lining here is that stocks managed to rally yesterday and this morning. If the market can build on these gains, we may very well see a bullish continuation heading into next week.
But as more Wall Street banks issue guidance to their clients concerning the Fed’s tightening cycle, it’s likely that sentiment will only tilt lower over time.
For example, Goldman Sachs chief economist Jan Hatzius temporarily spiked stocks lower this morning with comments made in a Bloomberg TV interview.
“If the economy does not slow and if we, in particular, don’t get a pretty substantial slowdown in employment growth, then you’d be looking at [interest rates] that could go significantly higher, to the 4%-plus range,” he said.
Hatzius can be added to Wall Street’s growing list of senior advisors who now believe rates are going to soar opposite economic growth. Keep in mind also that the Fed’s next meeting isn’t until May 3rd. We have a long way to go until Fed Chairman Jerome Powell gives us more clarity on the Fed’s position.
That leaves plenty of time for more bearish notes from Wall Street’s top institutions as well as several key data releases. The much-watched Consumer Price Index (CPI) comes out on April 12th, followed by the Producer Price Index (PPI) one day later on the 13th. Both are expected to be blowout reports after energy prices surged through March in response to sanctions against Russia.
This will only strengthen the Fed’s case to hike rates aggressively while reducing its balance sheet.
And that, coupled with the general market’s recent selloff from 2021’s record highs, should have bulls feeling nervous about the next few weeks, even if April has historically been a strong month.