What you need to know this week

What you need to know this week

Markets are bracing for another strong rate hike next week as policymakers continue their fight against stubborn inflation.

Investors will be squarely focused on the Federal Reserve’s two-day meeting on September 20-21, with officials expected to deliver a third straight 75 basis point hike in their key interest rate after discussions on Wednesday at 2:00 p.m. ET.

Wall Street will also take its cues from Fed Chairman Jerome Powell’s post-event speech, along with the economic forecasts of members of the US central bank and the latest dot chart showing each official’s forecast for the key short-term interest rate of the central bank.

U.S. Federal Reserve Chairman Jerome Powell answers questions during a news conference in Washington, DC, May 4, 2022. (JIM WATSON/AFP photo via Getty Images)

U.S. Federal Reserve Chairman Jerome Powell answers questions during a news conference in Washington, DC, May 4, 2022. (JIM WATSON/AFP photo via Getty Images)

“In the updated forecast, we look for revisions towards less growth, higher unemployment and a higher terminal rate – however, we expect the path of inflation to remain largely unchanged,” wrote Bank of America analysts led by Michael Gapen. a note on Friday. “In our eyes, this would suggest that the risks of a hard landing are increasing, although we expect the average member to anticipate a soft landing.”

The Federal Reserve’s reading of expectations may determine whether markets will ease off a recent sell-off or extend sharp declines. On Friday, all three major averages recorded their worst week since June. The benchmark S&P 500 fell 4.7% in the week ended Sept. 16, the Dow Jones Industrial Average fell 4.1% and the tech-heavy Nasdaq Composite fell 5.5%.

Hotter-than-expected inflation data earlier this month sparked a new wave of pessimism about the U.S. central bank’s rate hike campaign and its potential to significantly curb economic growth.

The Consumer Price Index (CPI) in August reflected an 8.3% increase from a year ago and a 0.1% increase from the previous month, the Bureau of Labor Statistics said on Tuesday. Economists had expected prices to rise 8.1 percent from a year ago and fall 0.1 percent from the previous month, according to Bloomberg estimates.

Wall Street heavyweights including Bank of America, Goldman Sachs and Nomura all raised their rate forecasts immediately after the reading, raising expectations of a hard landing – a sharp downturn after a period rapid growth.

Goldman Sachs warned on Thursday that the stock market could sink another 26% if the Fed’s rate hike campaign sparks a recession.

“If only a severe recession — and a stronger Fed response to bring it — tames inflation, then the downside for both stocks and Treasuries could still be significant, even after the damage that we’ve already seen,” Goldman said.

Elsewhere next week, a slew of housing data is on the docket, with gauges on building permits, housing starts and existing home sales closely watched. The announcements will come after mortgage rates rose above 6% last week, the highest level since November 2008, exacerbating already rampant affordability concerns.

Traders work at the New York Stock Exchange (NYSE) in New York, U.S., September 9, 2022. REUTERS/Brendan McDermid

Traders work at the New York Stock Exchange (NYSE) in New York, U.S., September 9, 2022. REUTERS/Brendan McDermid

On the earnings calendar, results are expected from stocks such as FedEx (FDX), Lennar (LEN), General Mills (GIS), Costco (COST), and Darden Restaurants (DRI).

FedEx shares fell 21% on Friday – wiping $11 billion in market value for the shipping giant in its worst one-day drop on record after the company warned of a global recession in a dour earnings call. FedEx also withdrew its guidance for the full year, citing macroeconomic trends that have “deteriorated significantly.”

The logistics giant’s messages could be a sign of things to come as investors approach the next earnings season, with many strategists sounding the alarm on earnings expectations for the rest of this year.

According to data from FactSet Research, earnings growth expectations for the S&P 500 rose 3.7% for the third quarter, down sharply from expectations for a 9.8% increase at the end of June. Analysts have cut third-quarter earnings expectations over the past 2-3 months for every sector in the S&P 500 except energy, and seven of the index’s 11 sectors are now expected to post an absolute decline in earnings compared with three in the second Semester.

In a note on Friday, Bank of America’s Michael Hartnett said the recession’s shock to earnings per share could be the catalyst for new lows in the market, pointing to FedEx’s message.

Economic Calendar

Monday: NAHB Housing Market IndexSeptember (47 expected, 49 last month)

Tuesday: Building permitsAugust (expected 1.605 million, 1.674 million last month, revised to 1.685 million). Building permitsmonth-on-month, August (-4.8% expected, -1.3% last month, revised to -0.6%). Start housingAugust (1,450 million expected, 1,446 last month). Start housingmonth-on-month, August (0.3% expected, -9.6% last month)

Wednesday: MBA mortgage applicationsweek ended August 12 (0.2% last week). Existing Home SalesAugust (4.70 million expected, 4.81 million last month). Existing Home Salesmonth-on-month, August (-2.3% expected, -5.9% last month). FOMC rate decision (Bottom), September 21 (expected 3.00%, 2.25% last month). FOMC rate decision (Cap), September 21 (3.25% expected, 2.50% last month). Interest on overdue balancesSeptember 22 (3.15% expected, 2.40% last month)

Thursday: Current account balanceQ2 ($-260.8 billion expected, -$291.4 billion last quarter). Initial unemployment claimsweek ended September 17 (217,000 expected, 213,000 last week). Continuous claimsweek ended September 10 (expected 1,398, 1,403 last week). Top IndexAugust (-0.1% expected, -0.14% last month); Kansas City Fed. Construction ActivitySeptember (5 expected, 3 last month)

Friday: S&P Global US Manufacturing PMISeptember Preliminary (51.3 expected, 51.5 last month); S&P Global US Services PMISeptember Preliminary (45.5 expected, 43.7 last month); S&P Global US Manufacturing PMISeptember Prelims (46.0 expected, 44.6 last month)

Earnings calendar

Monday: AutoZone (AZO)

Tuesday: Stitch correction (SFIX)

Wednesday: FedEx (FDX), Lennar (LEN), General Mills (GIS), KB Home (KBH), Trip.com (TCOM)

Thursday: Costco (COST), Darden Restaurants (DRI), FactSet (FDS)

Friday: Carnival (CCL)

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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