Top 5 Things to Watch in Markets in the Week Ahead

© Reuters

By Noreen Burke

Investing.com -- The Federal Reserves signal that interest rate hikes could come sooner than expected is expected to dominate market sentiment in the coming week and likely the months ahead as market participants digest the hawkish shift in policy guidance. As a result, an appearance by Fed Chair Jerome Powell before Congress on Tuesday will be in focus, as will comments by several other Fed officials during the week. Friday’s data on personal income and spending will be closely watched as it contains the core PCE price index, which is rumored to be the Fed’s favorite measure of inflation. Stock markets traded lower last week, with value stocks in particular taking a hit and this pattern looks set to continue, in the short term at least. In the UK, the Bank of England meets on Thursday with markets on the lookout for new rate hike clues. Here’s what you need to know to start your week.

1. Hawkish Fed shift

The Fed surprised markets last week when it projected two potential rate hikes in 2023, sooner than markets had anticipated and signaled that it was also reaching the point where it could begin talking about tapering its $120 billion a month stimulus program.

The shift in guidance was underlined when St. Louis Fed President James Bullard said on Friday that a move towards faster tightening of monetary policy was a "natural" response to economic growth and rising inflation as the economy reopens in the wake of the coronavirus pandemic.

The question of whether stronger than expected inflation would prompt the Fed to act sooner had already been hanging over financial markets in the run up to the policy meeting.

Now more uncertainty may be on the way ahead of the central bank’s next meeting in July and its annual conference in Jackson Hole, Wyoming, in late August, where it could announce more details of its tapering plans.

2. Powell testimony

Market participants will be closely watching comments by Fed Chair Jay Powell on Tuesday when he is due to testify, via satellite link, on the Fed’s emergency lending programs and current policies before the House Select Subcommittee on the Coronavirus Crisis.

In addition, several other Fed officials are due to make appearances during the week and their comments will also receive a lot of attention as markets look for fresh cues on the future direction of monetary policy.

New York Fed head John Williams (NYSE:WMB) and St. Louis Fed President James Bullard are both set to speak on Monday, while Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly both speak on Tuesday.

Other Fed speakers during the week include Atlanta Fed President Raphael Bostic and Boston Fed President Eric Rosengren.

3. Stock market slide

U.S. stocks ended sharply lower on Friday, with the Dow and S&P 500 recording their worst weekly performances since late October and late February, respectively. The tech-heavy Nasdaq index also ended lower.

The declines were marked by a slide in value stocks, a pullback in some commodity prices as well as a rally in the dollar and U.S. government bonds.

"I'm not surprised to see the market sell off a little bit. I'm never surprised, given the strong run we've had for such a long period of time, when you see some periods of profit-taking," Tim Ghriskey, chief investment strategist at Inverness Counsel in New York told Reuters.

"Next week, you will have various Fed governors give speeches, and we'll have the same thing: some governors will be more hawkish, and some will be more dovish, so you'll see some back-and-forth," Ghriskey added.

4. Economic data

Investors will be paying close attention to the week’s upcoming economic data for clues on whether the recent surge in inflation - which saw consumer prices accelerate in May at the fastest rate in almost 13 years - is continuing.

Data on personal income and spending for May is due out on Friday, which contains the core PCE price index, supposedly the Fed’s favorite inflation gauge.

The economic calendar also features reports on new and existing home sales, durable goods orders, manufacturing and service sector activity and the weekly report on initial jobless claims, which is given close attention, given the uneven recovery in the labor market.

5. BoE meeting

The Bank of England is set to hold its latest policy meeting on Thursday, the last for chief economist Andy Haldane.

Haldane is the sole advocate on the BoE’s monetary policy committee for reducing stimulus measures amid rising inflation. Inflation in the UK rose above its 2% target in May for the first time in two years.

Most analysts are not expecting any policy changes after the BoE last month said it would slightly slow the weekly pace of its bond purchases. The recent decision by British Prime Minister Boris Johnson to delay the full economic reopening by a month could be seen as reason for policymakers to stick to their cautious stance.

But some analysts have not ruled out a discussion around tapering, particularly with other global central banks, notably the Federal Reserve, starting discussions on exiting stimulus measures.

--Reuters contributed to this report