Can Stocks Handle Fed Tightening?

The stock market may still have to contend with the Russia/Ukraine situation, but the impending Fed rate hike may not be an obstacle for a renewed rally.  While the start of a series of Fed rate hikes is expected to begin at the March 15-16 FOMC Meeting, the consensus has moved to a modest 25 BP hike for the first move.  Fed Chair Powell's testimony on Wednesday and Thursday will not likely endorse this expectation specifically, but indicate that the pace of hikes will likely be faster than in the 2015-17 period.  Even if the frequency of rate hikes is faster than in this earlier episode, the stock market should take it in stride as long as economic growth does not look to be impaired significantly.   

The US economic data so far suggest GDP growth looks to be decent in Q122.  The rebound in January Retail Sales keeps open the door for consumer spending to grow at about the same pace as the 3.2% in Q421.   But, there are some negatives in the consumer outlook: /1/ The surge in oil prices represents a tax that will drain spending away from other goods and services and /2/ the end of the advance Child Tax Credits could hurt.  Aside from consumption, it remains to be seen how much of the massive inventory build in Q421 unwinds this quarter.  At this point, Unemployment Claims data suggest the labor market continues to improve.  Both Initial and Continuing Claims in February are below their Q421 averages.

The near-term inflation outlook is not good -- and unless it proves temporary could eventually force the Fed to tighten by larger increments.  The run-up in oil prices will filter through to higher transportation costs for many goods and services.  The dollar continues to fall relative to the Chinese currency, raising the risk of higher prices of goods imported from there.  And, there is no sign that wage inflation is abating.  Technically, bi-monthly sampling could keep start-of-year price hikes showing up in the February CPI.

This week's US economic data are expected to remain strong.   Consensus looks for an uptick in the Mfg ISM to 58.0 in February from 57.6 in January.  But, the evidence is mixed, so a dip can't be ruled out.  Consensus expects Nonfarm Payrolls to slow only modestly, to 450k m/m from 467k in January.  The evidence is mixed regarding a speedup or slowdown.  Consensus sees a downtick in the Unemployment Rate to 3.9% from 4.0%.  Whether it falls could depend on the Labor Force Participation Rat not rising.  Consensus expects a high Average Hourly Earnings, up 0.5% m/m after 0.7% in January.  It would remain above the prior 0.4% trend for the 3rd month in a row.