Investors will have a variety of potentially market-moving events to contemplate this week, with corporate earnings season ramping up and a Federal Reserve monetary policy decision on deck.
The Federal Open Market Committee (FOMC) will meet for its April meeting on Tuesday and Wednesday, with a monetary policy decision and press conference from Federal Reserve Chair Jerome Powell slated for Wednesday afternoon. With the Fed having already signaled that benchmark interest rates would remain on hold through at least 2023, market participants are expecting virtually no major changes to policy to be announced at the conclusion of this April FOMC meeting.
Powell himself has suggested that the Fed's first action once it begins shifting its policy posturing, will be to adjust the central bank's crisis-era asset purchase program, which is currently taking place at a rate of $120 billion per month. In past press conferences and public remarks, however, Fed officials have signaled they were still not inclined to even begin thinking about tapering these quantitative easing policies, given the lingering uncertainty around the pandemic.
But even in the month since the last Federal Reserve meeting, data on the economic recovery has firmed considerably, building a case for easing support. Initial jobless claims plunged to a pandemic-era low last week, and retail sales jumped nearly 10% to rise by the most since May 2020. IHS Markit's manufacturing and service sector purchasing managers' indices rose to the highest level in survey history, as pent-up consumer demand prompted a quick pick-up in both the goods-producing and service-providing areas of the economy.
"At the conclusion of the April FOMC meeting, we expect Chair Powell and the FOMC to give a more positive view of the economy but reiterate that the economy needs to make further progress before signaling any policy change and risks remain from the virus," Bank of America chief economist Michelle Meyer wrote in a note.
"The policy statement and the press conference are likely to emphasize that while the Fed is encouraged by the recent data, the recent acceleration in inflation should prove temporary and the labor market recovery is far from complete," she added. "On asset purchases, we will look to see if Powell reiterates that it will be 'some time' before achieving 'substantial further progress' or changes the description of the path. We believe 'some time' is still appropriate, but there is a risk that he shifts."
Others have also suggested that the rapidly strengthening economic backdrop could prompt a similarly faster than currently telegraphed shift in Federal Reserve policy. This could come both as a response to an economy no longer in need of such immense support, and as a means of staving off a potential surge in inflation as demand outpaces supply during the recovery.
"With the economy opening up more and more each day, we are anticipating a series of 1 million-plus monthly payroll gains that could be enough for the Federal Reserve to call 'substantial further progress' and start the tapering process before the end of the year," ING chief international economist James Knightley wrote in a note Thursday.
Others, however, expect monetary policymakers to continue to demur on talk of tapering for the near-term.
"We don’t expect any substantive new signal yet on tapering—or tightening—even as the tone on the economy is more positive than in March," Jim O'Sullivan, chief U.S. macro strategist, wrote in a note. "We expect the signaling to evolve over time as the recovery proceeds, and we just changed out forecast for the start of tapering to March 2022 from September 2022, but we expect officials will be reluctant to say anything that could be construed as a tapering countdown signal until much later this year."
Big Tech earnings
The bulk of the mega-cap technology companies will report first-quarter earnings results this week. The companies – including Amazon, Alphabet, Facebook and Google – are up against heightened expectations, with tech stocks having largely benefited from stay-at-home trends during the pandemic, and as earlier quarterly reports set a high bar.
Companies comprising just over one-quarter of the S&P 500's market capitalization had reported first-quarter results as of Friday morning, according to an analysis from Credit Suisse's Jonathan Golub. Eighty-three percent of companies reporting results had posted earnings that topped estimates, with the beats coming in an aggregate of 23.1% above expectations.
That said, the reaction to last week's report from Netflix (NFLX) underscored the dangers of high expectations. Netflix's disappointing first-quarter net subscriber additions and current quarter guidance served, to some, as a harbinger of the difficult stretch ahead for tech companies: Most will have especially tough year-over-year comparisons as they lap the results they posted last year that had been aided by stay-at-home trends.
Reference: Yahoo Finance
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