Market Insider

Fed speakers and earnings from Goldman Sachs and others could influence Tuesday's market

Key Points
  • Earnings, including Goldman Sachs and Johnson & Johnson, could help set the tone for stocks Tuesday.
  • Fed speakers, including Fed Vice Chair Randal Quarles, could get a lot of attention Tuesday.
  • In the bond market, traders were watching an interesting move in the swaps market that in the past has foreshadowed an end to Fed rate hikes and a potentially weaker economy.
A trader at the Chicago Board Options Exchange (CBOE) in Chicago, Illinois.
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Earnings from several companies, including Goldman Sachs, and important Fed speak could be big for markets Tuesday.

Goldman reports, along with Johnson & Johnson and UnitedHealth, before the market open. IBM and United Continental report after the close. There's also housing starts at 8:30 a.m. ET and industrial production at 9:15 a.m.

Stocks surged Monday, with the gaining 0.8 percent to 2,677, as traders focused on earnings season after the weekend air strikes on Syria appeared to be contained.

Bond yields, which move opposite price, rose as traders were watching an interesting move in the swaps market that in the past has foreshadowed an end to Fed rate hikes and a potentially weaker economy.

Netflix, meanwhile, could be a positive for stocks Tuesday. Its shares jumped about 6 percent after Monday's market close, following an earnings report that showed it added nearly 2 million subscribers in the first quarter, much more than expected.

speakers could also get a fair amount of attention.

Fed Governor Randal Quarles appears before the House Financial Services Committee at 10 a.m. ET for the Fed's semi-annual testimony on supervision and regulation of the financial system.

Quarles will be watched closely for insight on the Fed's views on loosening regulation and also on its own announcement that banks should be allowed to take on more leverage.

Other Fed speakers could also be important. San Francisco Fed President John Williams speaks at 9:15 a.m. ET on the economy at a conference in Spain. Philadelphia Fed President Patrick Harker speaks at 11 a.m. ET, and Chicago Fed President Charles Evans speaks at a Chicago Rotary luncheon at 1:40 p.m. ET.

"Evans will be interesting," said Tom Simons, chief money market economist at Jefferies. "He kind of flipped on inflation. I'd like to hear a more direct commentary."

Evans recently said he's optimistic inflation will reach the Fed's 2 percent goal and that slow gradual rate increases are appropriate.

While stocks rallied Monday, bond traders were watching an interesting market move that hasn't occurred in about 12 years.

William O'Donnell, rates desk strategist at Citigroup, said he was watching the one-year forward on the 2-year, 10-year swap, which indicates what traders believe the shape of the yield curve will be in a year.

Traders have been watching the yield curve, or the spread between the 2-year note yield and the 10-year note yield, get flatter and flatter.

It reached 45 basis points Monday, the lowest since 2007. The flat curve suggests weaker economic activity, but an inverted curve, where the 2-year actually rises above the 10-year yield, is a sign of a coming recession.

According to the swap, the curve could be flat a year from now since it reached zero for the first time since 2006. O'Donnell said when the swap has flattened out or gone negative, the Fed hiking cycle has lasted another three or four months.

"In modern bond market history it has spent only a very few weeks below flat. If you go back to the last tightening cycle in early 2006, the flattest that curve got was zero. It hit that low three or four months before the last rate hike," said O'Donnell. "This is going to get some excitement going in the late-economic-cycle crowd."

Some traders believe the flattening yield curve is symptomatic of a late economic cycle.

"It's a clear indication that the whole world thinks the curve is going to invert," said Ian Lyngen, head of rate strategy at BMO.

For some traders, the flattening curve is a sign that the Fed may be too ambitious about raising rates too much or too rapidly in a low-inflation environment.

"We are into the zone in the forward curve that typically marked the end of the tightening cycle," said O'Donnell.

President Donald Trump meets with Japanese Prime Minister Shinzo Abe in Florida for two days starting Tuesday. They are expected to discuss North Korea but also focus heavily on trade. Trump is expected to push a bilateral deal with Japan, but Abe would like the U.S. to join the Trans-Pacific Partnership, which Trump exited.

Earnings are also expected from Comerica, Northern Trust, Progressive and Omnicom before the opening bell. Lam Research, Intuitive Surgical and Interactive Brokers are among companies reporting after the close.