As stocks struggle to break to new highs, markets could be swayed by Fed speakers, trade

Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the opening bell on August 19, 2019 in New York City.

Drew Angerer | Getty Images

Developments in U.S.-Chinese trade talks and the comments from a host of Fed speakers could be important for markets in the week ahead, as stocks struggle to regain highs.

The Fed in the past week cut interest rates for the second time in two months, but the forecasts of Fed officials showed just how divided they are on the need for future rate cuts. Five wanted deeper cuts, five didn’t want any cuts and another seven were happy with the Fed’s action.

“The market seems like it’s pretty jumpy based on what the say. i think it would flip back and forth depending on how the headlines come out,” said Tom Simons, money market economist at Jefferies. Simon said the focus will also be on the Fed’s operations in the short-term funding market, after turbulence in the overnight market early this week that temporarily sent some overnight rates up sharply.

There are nearly a dozen Fed speakers on the calendar next week, but Fed Chairman Jerome Powell is not scheduled to speak.

Trade developments could continue to cause volatility in markets. A report Friday that Chinese agriculture officials canceled visits to farms in Montana and Nebraska sent stocks lower, for fear it signaled that talks were not making progress.

Stocks in the past week were lower, with the S&P off about 0.3%. The index had been around 1% or less away from its all-time high for a few weeks.

“Tech that has been out of play and faulty. it’s now turning into a headwind and that could cause a problem for the bulls,” said Scott Redler, partner with T3Live.com.

“It’s hard for the market to make new highs without tech. At best, it’s concerning when you see key names, like Amazon and Netflix, not just failing to lead but faltering,” he said. Netflix was down more than 8% for the week, and Amazon was off 2.6%.

Following the attacks on Saudi Aramco last week, the United Nations General Assembly in New York and meetings around it take on more importance for markets. U.S. and Saudi Arabian officials have said Iran was behind the attack, which knocked a significant amount of Saudi oil production off line. Iran has denied involvement, and Houthi rebels in Yemen have claimed responsibility.

Iran’ President Hassan Rouhani has been given a visa to travel to New York for the UN. Before the attack on Saudi Arabia last week, President Donald Trump had suggested he would speak to Rouhani but there seems little chance of that now. Oil have been highly volatile, with Brent crude futures up 7% since the attack as Saudi Arabia sought to assure markets that it would be able to bring its operations back on line.

There is some economic data that will also be important to markets. There is manufacturing PMI Monday, important after ISM manufacturing data showed a contraction in August. Durable goods will also be important on Friday, as will personal consumption data, which includes the Fed’s preferred inflation indicator, the core PCE deflator.

“What Powell said in his remarks was inflation was below his target,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “But even the core PCE deflator is expected to be 1.8, a new high for the year.” The Fed’s target inflation rate is 2%, and other inflation measures have been above that, including core CPI.

The Fed will also be in focus after problems in the overnight funding market, used by banks in need of short term cash. Rates spiked for repo, or repurchase agreements, in a chaotic two-day period Monday and Tuesday. The Fed’s target fed funds rate also moved above its target range, in an unusual move.

The market has since calmed after the Fed carried out open market operations to add liquidity to the market. On Friday, it announced three 14-day operations involving $30 billion as well as continued overnight operations of at least $75 billion each.

“I think the Fed has absolute control over short term rates. It was caught sleeping at the wheel,” said Chandler.

Powell said the Fed would monitor the market and take whatever action is needed. The market is considered the basic plumbing for financial markets, where banks who have a short-term need for cash come to fund themselves. The odd spike in rates was viewed as the result of a cash crunch, not a credit crisis.

Bond market pros have been concerned that the Fed would again see strains in the market at month end, when there’s more activity in the overnight funding market.

“It gets you further past quarter end,” said Jon Hill, rate strategist at BMO. “A 14-day pushes them further into October. I think nerves will have calmed. The fact you’ll see fed funds print clearly in the range will reassert confidence. These operations will serve as a reminder that the Fed can have absolute control the front end if and when it wants to. This is a good thing.”

The funds rate was at 1.90% Thursday, within the target rate range of 1.75% to 2%.

“They’re removing any doubt of their ability to take control of fed funds in the modern framework. They just announced $165 billion over quarter-end , and we may go bigger. They haven’t done a repo injection in 10 years,” said Hill.