February's employment report is about the only thing that stands between the Fed and a March rate hike.
For that reason, the monthly jobs report, as usual, is the big event for markets in the week ahead. Economists expect 190,000 jobs and an unchanged unemployment rate of 4.7 percent, according to Thomson Reuters. They expect average hourly earnings to rise 0.3 percent, after a disappointing 0.1 percent last month.
The oil market could also be a source of interest in the week ahead as traders watch comments from major OPEC figures and other producers attending the annual weeklong CERAWeek Conference. Traders are watching to see if OPEC and non-OPEC producers like Russia will comment about whether they plan to extend the production deal that has been supporting oil prices above $50 a barrel.
Stocks ended the past week with gains, and Treasury yields zipped higher, as a parade of Fed officials spoke on a daily basis about the possibility of a Fed interest rate hike in March. Fed Chair Janet Yellen Friday was also strident, saying the Fed could hike rates in March as long as the economy continues to grow.
The rate hike, expected at the two-day meeting March 14 and 15, would be the third in about 10 years, as the Fed has slowly pulled away from its strategy of holding rates at zero while the economy healed. The markets responded in the past week by driving Treasury yields higher, and Fed funds futures signaled odds of more than 80 percent for March.
For a market so set on June for the next rate hike, there will be an adjustment as expectations for the whole year shift, and for now, they vary widely. Citigroup, for instance, maintains its call for just two rate hikes. UBS upped its view to three hikes from two, and NatWest Markets went from two to four.
"This is quite unusual in relation to recent history. It does make one wonder if there was some kind of coordination, intentionally, to talk up the market. The last time we heard from Yellen and [Fed Vice Chair Stanley] Fischer, they were discussing a gradual approach. Just the drum beat of Fed speakers this week shows they at least wanted to have the option of going at this meeting. The fact the market is handling it means it would be disappointed and quite surprised if it didn't hike. That makes you think the Fed will follow through," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.
Cabana said Yellen noted that payroll growth of 75,000 to 125,000 is enough to keep employment growth steady, so the jobs report could have a big miss and the Fed could still hike in March. "If you get something close to trend labor force growth, they're OK with it. Anything above that makes the Fed quite pleased," he said. In January, payrolls grew by 237,000, above a trend closer to 180,000.
The Fed's rate hiking campaign jolted short-end Treasury yields out of a recent range, and bond strategists say the biggest moves may already happened ahead of the March rate hike. After Yellen spoke Friday, the two-year Treasury yield jumped to a 2009 high of 1.34 percent, and the 10-year Treasury edged up to 2.51 percent. The 2-year was at 1.30 percent in late trading, and the 10-year was at 1.48 percent.
"What's remarkable is this time last week, we were wondering if March was even remotely on the table. To go from wondering if it's on the table to a near certainty is almost unprecedented," said Julian Emanuel, equity and derivative strategist with UBS.
The Fed has been forecasting three rate hikes for this year, but until recently the markets had priced in just two in the futures market. Emanuel said it will be important to watch the expectations now for the Fed's June meeting, and the Fed could also change its own forecast to four rate hikes for this year after the March meeting. That meeting is March 14 and 15.
Emanuel said the idea of higher interest rates are not expected to especially hurt the market for now, but if there is a big move in yields on the long end, the 10-year part of the curve, that could become a problem. Markets have traded for years in an environment where long-term rates have been suppressed by easy monetary policy around the globe.
"Basically, stocks and bonds go back to the old types of relationships prior to the financial crisis, and that has been yields rise, equities fall," said Emanuel. "If the Fed is successful, you are going to change the way people look at stocks and bonds. … That is a source of potential volatility in the months ahead because there's been an entire generation of strategies built on the premise of risk on, risk off. … If this relationship reverts to the way it was in the 1990s, when there was no such thing, that's where you're going to see a potential source of instability."
Emanuel does see the market valuations as stretched, and has been on the look out for a pullback.
Washington will continue to be a focus in the week ahead, as investors watch to see if there's any progress made toward market-friendly policies like taxes or fiscal stimulus. The replacement of Obamacare is also a factor since it is viewed as a necessary step before Congress will focus on tax reform.
But Jim Paulsen, chief investment strategist at Wells Capital Management, said way too much focus is being put on President Donald Trump's policies. "I think there's too much pessimism about Trump's policy," he said, explaining investors think if the president doesn't follow through on a big tax reform package the market will fall apart.
"The reason the Fed is hiking rates is because we're getting bombarded with good economic reports," said Paulsen. This week, "ISM nonmanufacturing and ISM manufacturing, not only were they both good, but the important components for the future — new orders were both up over 60 percent in both cases."
Paulsen expects the market to keep rising in the near term. "If anything, the market's going to like the fact that the Fed is lifting rates and see it as a sign of how improved the economy and earnings momentum is. They're still looking at the Fed resonating more as good news than bad. It's the normalization of policy," he said.
Scott Redler, partner with T3Live.com, follows the market's short-term technical moves, and he said stocks made important inroads in the past week, pointing to the S&P 500 breaking the key 2,400 level and the Dow rising above 21,000. The S&P ended the week below that level at 2,383, still up 0.7 percent, and the Dow was up 0.9 percent at 21,005. Nasdaq rose 0.4 percent to 5,870.
"The market does have a bit of an exhaustive feel. I think the bears would love to think with two major events like the Trump address to Congress and the Snap IPO, with heavy valuations, and now Yellen pretty much signaling three rate hikes will happen, it would be the kind of week they sell the news and we finally get a corrective phase," he said. "Traders are trying to stay with the rally but the higher we go, the harder it is."
Redler said the market made a stand when stocks turned around Friday afternoon, after the Dow saw a 100-point-plus loss Thursday after a 300-plus-gain Wednesday.
"I think even the bulls would like a correction at this point. High-beta tech feels a bit exhausted. ... You had nice new higher trades in the banks and Apple, but the banks feel tired," he said.
Redler said he's watching the comments from the CERAWeek by IHS Markit conference in Houston. On the agenda are OPEC Secretary General Mohammad Sanusi Barkindo; the oil ministers from Saudi Arabia, Russia and Iraq, as well as major oil companies. The CEOs of Chevron, Exxon Mobil and BP are among the scheduled speakers.
"Traders will see if oil could hold $51, $52. A lot of people are trying to say that energy stocks are the safe way to play the market in the week ahead. Traders are going week by week now to find out where money is rotating," he said. West Texas Intermediate futures for April settled at $53.33 per barrel Friday, off 1.2 percent for the week but up 1.4 percent on the session.
Redler said energy stocks have been lagging this year. The S&P energy sector is down 5.5 percent since the start of 2017, the only negative major sector besides utilities. "If [oil] can take out $54 with authority, they can play upside catch up," according to Redler. He said the Energy Select Sector SPDR ETF, XLE, would have to hold $71.50 to stay constructive, and if it breaks above the descending trend line at $73, it will attract more buying. It ended Friday at $71.99.
CERAWeek conference begins
Earnings: Korn Ferry, Thor Industries, Ascena Retail, Analogic, IDT
IEA Energy outlook
5:00 a.m. OECD outlook
10:00 a.m. Factory orders
3:00 p.m. Minneapolis Fed President Neel Kashkari
8:30 a.m. Trade deficit
3:00 p.m. Consumer credit
8:15 a.m. ADP payrolls
8:30 a.m. Productivity and costs
10:00 a.m. Wholesale trade
7:45 a.m. European Central Bank rate decision
8:30 a.m. ECB President Mario Draghi briefing
8:30 a.m. Jobless claims
8:30 a.m. Import prices
Earnings: The Buckle, Vail Resorts
8:30 a.m. Employment report
2:00 p.m. Federal budget