March news could shake the markets badly

Four major events over the next two trading weeks will be key catalysts in determining whether this year's stock market recovery will be derailed or resumed after February's downturn.

It all starts on Tuesday, when Federal Reserve Chairman Jerome Powell delivers his two-day monetary policy speech on Capitol Hill. As the S&P 500 Index nears its best week in a month, investors will be looking for any hint of a path to an interest rate hike by the central bank.

"The market is clinging to every positive thing Powell says," said Emily Hill, a founding partner at Bowersock Capital. "The minute the word 'disinflation' came off his lips in a speech earlier this year, the market took off."

Indeed, the rally late last week was sparked by an announcement by Atlanta Fed Governor Rafael Bostic that the central bank might pause this summer.

After Powell, comes the February jobs report on March 10 and consumer-price index on March 14. Another hot reading on employment growth and inflation could dash any hopes that the Fed will pullback soon.

"There are such conflicting signals in the economy," Hill said. "So you're going to see overreactions from investors to the upcoming data."

Then, on March 22, the Fed will give its policy decision and quarterly interest-rate projections, and Powell will hold his press conference. After that, investors should have a pretty clear idea of whether the central bank will halt its rate hikes some time in the coming months.

As for the stock market itself, a sense of calm prevails. The S&P 500 showed a daily move of less than 0.5% in either direction during the three trading days ended March 1, a streak of calm last seen in January when investors raised their bets that the U.S. economy could prevent a recession as inflation declines.

So, let's look at it in order:

The Fed chair's biannual monetary policy report to the US Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday are likely to offer hints on the US economic outlook, specifically inflation, wage pressures and employment. Traders will also look for clues on additional steps the Fed will take to control elevated prices.

The labor market was strong in January. That's an important driver of inflation, because wage growth can keep prices higher. And it's a risk for stock prices because sticky inflation would prevent the Fed from pausing rate hikes. Economists predict that the February unemployment rate will come in at 3.4%, unchanged from January. Nonfarm payrolls growth is expected to drop to 215,000 after a surprising burst of 517,000 jobs a month earlier. But ultimately the data comes down to wages and whether the Fed thinks they're slowing fast enough to drive inflation lower.

The February CPI reading is crucial after it jumped earlier in the year. Any sign of solid inflation could push the Fed to raise rates even higher than expected. The CPI forecast for February is 6%, up from January's 6.4%. The core CPI, which excludes volatile food and energy components and is considered a better baseline than the core indicator, is projected to rise 5.4% from February 2022 and 0.4% from a month earlier. The Fed's inflation target, which takes into account more than just the CPI, is 2%.

The market is pricing in a September peak in interest rates at 5.4%, nearly a percentage point above the current effective federal funds rate. Traders are preparing for the possibility of the Fed returning to jumbo rate hikes, with overnight index swaps pricing in about 31 basis points of tightening later this month.

Of course, the Fed's forward expectations and Powell's comments after the decision will affect market sentiment. But it's about big misses, like inflation readings coming in much hotter than expected, that would derail the stock market's recovery attempts, according to Michael Antonelli, market strategist at Baird.

"If the terminal rate goes from 5% to 5.5%, that will be a headwind, but it won't crater the stock market the way it did last year," Antonelli said in a phone interview. "Last year, we didn't know what the worse-case scenarios was going to look like, but this year the window of potential outcomes is much narrower. And investors like that."