Powell Testimony Could Make or Break Markets This Week. Here's My Take

Fed Chief Jerome Powell testifies on Capitol Hill on Wednesday and Thursday, giving him an opportunity to clarify policy. For us mere mortals -- ahem, investors -- the testimony will give a sense of what Washington is prioritizing. The occasion? Powell will testify before the Senate Banking Committee on Wednesday, and, again, before the House Financial Services Committee on Thursday. Annual bank stress tests will be released at the end of the day on Thursday. (Remember, these stress tests are aimed at making sure major banks have enough capital to keep operating normally after losses -- and can continue to lend people and businesses during a tough recession.) I think it is quite simple for Wall Street this time. If leadership in Washington zeros in on recession fears, then we could see markets rally. Apparently, President Joe Biden reached out to former Treasury Secretary Larry Summers, who I view as against current policies, to discuss the possibility of a recession. The more D.C. focuses on recession worries, the more leeway Powell has to ease up on his hawkish rhetoric. Remember, a Washington worried about recession, with Powell sounding dovish, is good for all markets. A Washington worried about recession, with Powell sounding hawkish, however, is bad. Seems extremely unlikely, but possible. But what if political leaders are fixated on inflation over fears of recession, and choose to play the blame game? That could be bad for the markets. There is some hope that we are getting ahead of the inflation curve -- that some factors that influenced inflation are dissipating. That has helped the market start the holiday-shortened week with some equity strength. If rising prices, however, prove the No. 1 concern on the Hill and Powell agrees, however, then equities will do poorly. Hiking into a slowing economy while not worrying about future risks, is the exact scenario Wall Street and most of Main Street hates -- even if the politicians haven't figured that out. What could change that dynamic? If D.C. is all-in on inflation, but Powell acts as the voice of reason, and focuses on the health of the economy, we could do better again. How big a deal is all this for traders? For stocks, this testimony is likely to be the most important driver of the week. But there's some secondary news I want to mention: Lithuania has banned Russian rail shipments of E.U.-sanctioned products between Kaliningrad and the rest of Russia. That move could potentially give Russia an excuse to escalate fighting. Kaliningrad remains an important naval base for Russia. Central banks across the globe could swing markets. Will the European Central Bank really support Italian and Spanish debt in a meaningful way? Will Japan back down on its yield peg? Will the Swiss Central Bank sell assets? China, which is aggressively battling Covid, could see its central bank also provide clarity in one direction on the other. Cryptocurrencies seem to be somewhat coming apart as a market driver, though not entirely. Bitcoin broke $18,000 briefly this weekend, but has rebounded strongly, trading around $21,000 at 8 a.m. on Tuesday. But, I believe adoption is grinding to a halt and even some believers are considering selling. I think we have gone from a fear of missing out to FOHO: a fear of holding on. Until there is more confidence that stablecoins are stable, that various servicing entities won't restrict withdrawals and the layoff announcements stop, it will be difficult for crypto to bounce. That is bad in its own right, but the spillover effects of a drop to $10,000 would impact the economy as the wealth effect would be gone and advertising spending, hiring and even mining rig purchases would slow to a crawl. Enjoy the calm start of the week, but don't expect it to last. There is a chance that by the end of the week, we will have an all-clear signal, which would be nice at these valuations, but I don't think we get there yet as the tone of politicians and central banks isn't conducive to adding risk, yet.

Powell Testimony Could Make or Break Markets This Week. Here's My Take

Whether talk of inflation or recession dominate could signal a lot to investors as the Fed talks to Congress Wednesday and Thursday ahead of the bank 'stress test' report.

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