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Jan 28, 2019

Fed, Jobs Report Test Hopes for Central Bank Caution

The Wall Street Journal.
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Markets
It's shaping up to be another busy week. I'm Jessica Menton, taking you through today's pre-market action.
  • Stock futures are sliding. We're watching to see whether the Dow industrials can notch gains for a sixth straight week after ending higher Friday.
     
  • Tech earnings dominate the calendar. Apple, Amazon, Facebook and Microsoft are among the companies turning in fourth-quarter results this week. Caterpillar is on tap this morning. A number of other industrial, consumer-products and energy companies are also due.
     
  • The Fed and the jobs report are in focus. Our Daniel Kruger explains why investors' hopes will get a fresh test in the coming days, as the central bank releases a policy statement Wednesday ahead of the closely watched employment gauge Friday.
 

Markets in a Minute

Markets Data
 

Overnight Developments

 

Fed Bondholdings Take Center Stage for Markets

By Daniel Kruger, bond market reporter
Investors’ hopes that the Federal Reserve will remain cautious about raising interest rates and paring bondholdings have helped spur January’s rally. Those hopes will get a major test this week.
Wall Street is still grappling with the effects of the central bank’s balance sheet taper on financial markets. Investors spent much of last year wondering whether the Fed’s reduction in bondholdings was aggravating market volatility. Stocks rose Friday after The Wall Street Journal reported officials were weighing a sooner-than-expected end to the Fed’s runoff of its bond portfolio.
The Fed accumulated its holdings of Treasury and mortgage bonds—$4.2 trillion at their peak, or about five times their precrisis level—as part of a series of attempts to spur economic growth after the financial crisis, reducing the availability of safe assets and pushing investors toward riskier securities.
By many accounts, the Fed succeeded. The stimulus added about 1,100 points to the rally in the S&P 500, according to David Rosenberg, chief economist and strategist at Gluskin Sheff.
The problem for analysts and investors is there was no precedent for the effort and no one’s certain about the ramifications of removing it. Former Fed Chairman Ben Bernanke once said the problem with quantitative easing is “it works in practice, but it doesn’t work in theory.”
Some analysts said investors viewed the Fed’s December forecast, which penciled in two rate increases and continued balance-sheet reductions in 2019, as a sign the central bank might continue withdrawing monetary stimulus until the economy suffered. 
Fed Chairman Jerome Powell’s Jan. 4 statement that policy makers would be flexible about raising rates and shrinking bondholdings improved sentiment, and helped power the recent rebound, said Katie Nixon, chief investment officer at Northern Trust Wealth Management. Reconsidering the balance-sheet reduction could also help lift stocks, she said.
Others were dubious about the central bank’s role in recent market swings. Investors were “extrapolating too much” about the potential for Fed policy to lead to slower economic growth and overreacted, said Sharmin Mossavar-Rahmani, chief investment officer of the Goldman Sachs Investment Strategy Group. Her base case is for stocks to return about 9% in 2019 and for the Fed to raise rates once or twice.

Market Facts

  • The S&P 500 climbed 10% from when the partial government shutdown began on Dec. 22 through Friday, the index's best performance during such an impasse since at least 1976, according to Dow Jones Market Data.
     
  • About $0.5 billion flowed out of global equity funds during the week ended Jan. 23, according to a Bank of America Merrill Lynch analysis of figures from fund tracker EPFR Global. That marked the ninth outflow in the last 10 weeks.
     
  • Of the 22% of companies in the S&P 500 that reported fourth-quarter earnings results through Friday, 71% of them beat earnings-per-share estimates, in line with the five-year average, according to FactSet. The number of companies beating on revenue is below the long-term average.

Key Events

The Chicago Fed National Activity Index for December is released at 8:30 a.m. ET.
The Dallas Fed manufacturing survey for January will be issued at 10:30 a.m. 
 

Must Reads

Apple is among the large technology companies investors will be watching when earnings are reported this week. PHOTO: ARND WIEGMANN/REUTERS
With tech earnings and trade talks in the background, the Fed meeting will test stocks. The rare confluence of results with a Fed meeting, jobs report and trade talks in Washington could upend the stretch of quiet trading in financial markets.
Europe’s sputtering economy is giving investors the jitters. Investors are backing away from European assets, as worries over slowing growth and political uncertainty push the European Central Bank to rethink plans to tighten monetary policy this year.
Stocks started off 2019 with a bang. Stocks around the world are rallying at the fastest pace in months, the latest sign that the fears investors grappled with late last year have largely subsided. But worries remain that markets still aren’t on solid ground.
China replaced its top securities regulator amid market weakness. China replaced its top securities regulator with a senior banker, as authorities look for ways to boost market sentiment amid a broad economic slowdown.
A popular hedge fund bet on Fannie and Freddie is paying off this year. Some of Wall Street’s biggest investors are sitting on a paper windfall this year as the government ratchets up a debate over the future of mortgage-finance giants Fannie Mae and Freddie Mac.
The SEC is investigating Nissan over Carlos Ghosn's pay disclosures. Nissan said Monday it received an inquiry from the U.S. Securities and Exchange Commission and was cooperating with the financial regulator, but declined to provide further information.
 

What We've Heard on the Street

“Even in the best of times, investors can’t dismiss entirely the risk that the U.S. will slide into a recession within the next year. These aren’t the best of times.”
—Heard on the Street columnist Justin Lahart
 

Stocks to Watch

eBay: Shares of the e-commerce company have posted gains for five consecutive weeks, the longest such stretch since August 2016. 
Arconic: The company's stock is up 10% in January, on course for its best month since July 2018. Last week, the aluminum-parts manufacturer scuttled a deal to sell itself to private-equity firm Apollo Global Management.
McCormick: Shares of the spice maker dropped 13% last week, their largest weekly percentage drop since January 1993, after the company said that it expects weaker sales growth this year.
IBM: The company's stock climbed 8.2% last week, its largest weekly percentage rise since October 2017. Shares have gained 18% in January, on pace for their best month since October 2002.

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