New York

Strong data and soothing words pulled markets out of a tailspin Friday, and Federal Reserve Chairman Jerome Powell and his colleagues have plenty of chances next week to bring traders closer to policymakers’ viewpoint on interest rates.

Surprisingly robust US labour figures on Friday helped close some of the gap between investors and the Fed’s projections, which imply two rate hikes in 2019. But rates markets still see the next policy move as a cut, possibly within the year, after weeks of sinking share prices shattered investor confidence.

If the Fed wants to prepare traders for another hike as soon as March, officials may conduct the flurry of speaking engagements scheduled for the days ahead as a listening tour. They’d be riffing off Powell’s comment Friday that he’s “listening sensitively to the message that markets are sending.” Stocks and Treasury yields surged as investors took that to mean the Fed won’t tighten to the point that it quashes economic growth.

“The bottom line for me was that financial conditions are going to be a key driver for Fed policy,” Kathy Jones, chief fixed-income strategist at Charles Schwab, said after Powell’s interview at the American Economic Association’s annual meeting in Atlanta.

As of Friday, stocks were on the upswing, with the S&P 500 climbing 3.3 per cent. Two-year Treasury yields soared almost 12 basis points to 2.49 per cent — the largest increase since 2015. Ten-year yields rose a similar amount to 2.67 per cent, climbing from the lowest since January 2018.

Looking forward

The issues most likely to alleviate or exacerbate market strains next week may not be on the calendar. If doubts about American growth have eased for now, the market is still contending with China’s weakening economy, the potential blow-back on corporate earnings from trade wars, and the impasse over the partially shuttered US government.

“These are all the forward-looking things that the market is trying to grapple with,” Jones said.

George Goncalves at Nomura sees two possible avenues for yields to extend their lift-off in the coming week.

One is supply, as the government sells a combined $78 billion of notes and bonds, and Nomura expects corporate issuance to rev up. Another would be if equities manage to build on their gains: If stocks have troughed, then yields may have too.

“Rates are just now a yin-yang of the equity market,” said Goncalves, head of Americas fixed-income strategy. “We got to extreme levels, and it’s all because everyone saw what happened to the equity markets in December.”

Equities also took comfort from Powell’s comments on the Fed’s willingness to adjust the pace of balance sheet unwind as needed, Goncalves said. Markets may welcome any confirmation of that flexibility in the Jan. 9 release of minutes from the Fed’s December meeting.