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Fed could be a surprise catalyst for the markets in holiday week

The quiet holiday week ahead could hold some fireworks for investors if the Federal Reserve reveals its thinking on its bond buying program.

The four-day trading week could see stocks drift, after hitting new highs this past week. The closely watched 10-year Treasury yield has held under 1.5%, a positive for tech which outperformed with a 3.2% gain for the week.

There are very few economic reports of note, aside from ISM services data on Tuesday. But the Fed’s minutes from its last meeting will be released Wednesday afternoon, and there is potential for the market to learn more about the central bank’s behind-the-scenes discussions on winding down its quantitative easing program.

Friday’s report that 850,000 jobs were added in June was better than expected. However, the unemployment rate missed expectations after rising by 0.1 percentage points to 5.9%. Economists expected the rate to fall to 5.6%. The report was not seen as strong enough to encourage the Fed to step away sooner from its easy policies. It was, however, seen as a positive — yet largely incomplete — picture of the labor market.

Daingerfield said there is the potential for the Fed’s June meeting minutes to surprise the market, similar to the way April minutes did.

“Remember, Powell said they were not talking about talking about tapering,” he said, referring to Fed Chairman Jerome Powell’s comments right after the April meeting. “Remember, Powell was very dismissive, and then the minutes revealed a kind of drift to the committee.”

The April meeting minutes did surprise investors when they noted that “a number of participants” said it would be appropriate to begin discussing tapering bond purchases at upcoming meetings if the economy continues to make rapid progress. After the June meeting, Powell revealed early stage discussions about paring back bond buying. The Fed also presented a new forecast that included two rate hikes in 2023, where there were none indicated before.

The market is highly sensitive to details about the Fed’s bond purchase program since the ending to that measure would be open the door for the central bank to raise interest rates. The low-rate environment has been the kindling behind the stock market’s robust gains since the Fed went all out to help the economy get through the pandemic. Cutting back on the monthly $120 billion bond purchases would be the first rollback of those extraordinary measures.

For now, the positive tone in the bond market has helped stocks. The 10-year yield, which moves opposite price, has fallen from its high of the year of about 1.75%. At that level, technology and growth shares were under pressure.

But they’ve been making a comeback as rates drift around in a range below 1.6%. The 10-year was at 1.43% Friday, and while the lower rate may help tech stocks, the yield level is a sharp contrast to an economy that was expected to grow at more than 10% in the second quarter.

That pace is expected to slow, but growth for the year is expected to be robust at more than 7%.

Tech transition

Citi Private Bank chief investment strategist Steven Wieting said that, with the economy peaking, the time is right for investors to begin transitioning to tech and growth shares from the popular cyclical trade.

 

Week ahead calendar

Monday

Independence Day holiday observed

 

Tuesday

9:45 a.m. Services PMI

10:00 a.m. ISM Services

 

Wednesday

10:00 a.m. JOLTS

2:00 p.m. FOMC minutes

 

3:30 p.m. Atlanta Fed President Raphael Bostic at National Association of Black Journalists event

 

Thursday

8:30 a.m. Jobless claims

3:00 p.m. Consumer credit

 

Friday

10:00 a.m. Wholesale trade

 

Reference: CNBC