The reaction to several major economic reports and technical conditions will determine where the market is heading next.
The market currently anticipates that the Fed will raise interest rates by 0.25% at its next meeting on March 22, but the odds of a 0.50% hike have increased to around 28% from zero a month ago. The economic news in the next two weeks is going to impact those odds, and that is going to move the market.
The first major event will be testimony by Jerome Powell in front of Congress Tuesday. According to a report in the Wall Street Journal, Powell is likely to caution that strong economic activity this year could cause the Fed to raise interest rates more than expected to battle inflation.
Powell's hawkishness isn't anything new, but the market has been fighting the Fed, and a narrative has taken hold that the market can handle higher rates if the economy and jobs stay strong. The problem with that argument is that the central bank is going to keep on hiking rates until inflation comes down, and if the economy stays strong, then inflation is very likely to stay elevated.
Powell testifies again on Wednesday, but there will also be the Job Openings report followed by weekly unemployment claims on Thursday and the February jobs news on Friday. The Fed is particularly concerned about wage-related inflation, so "hot" reports will likely increase the odds of a 0.50% hike in two weeks.
Next Tuesday, CPI will be reported, and that is followed by PPI on Wednesday. Both these reports were higher than expected recently, ramping up the likelihood of more rate hikes and the anticipated terminal rate.
These news events will have a significant market impact, but they must be considered in context with the recent technical action. What is most notable recently is that the market did not crack even as interest rates increased due to stronger-than-expected economic news. The S&P 500 held key support at the 200-day simple moving average and then moved sharply higher on Thursday and Friday.
The action on Monday was worrisome after the major indexes reversed after a strong open, and small-caps were pounded for a loss of 1.5%. There was strong rotation action and positioning, which was likely caused by worries about the upcoming data reports.
The reaction to Jerome Powell today will be of particular importance. It is unlikely that Powell is going to say anything new or surprising. The Fed has made it very clear that it will be resolute in going after inflation and has consistently reminded the market that rates will likely go higher for longer than anticipated.
The market has been fighting the clear Fed hawkishness and has developed a number of narratives to support that behavior. What traders will need to do is to stay focused on the price action and see if the bulls can continue to push the market higher in the face of strong inflationary news.
We have some slight early strength to start the Tuesday, but there should be a reaction as soon as Powell's prepared remarks are released.