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After gaining momentum in the month of March, equity markets continued to trade in the red in the first full week of April 2022. In the week ended on April 8, 2022, the S&ampP 500 fell by 1.3% while indices such as the Nasdaq Composite and Dow Jones also declined by 4% and 0.2% respectively.

Inflation, interest rates, and bank earnings will drive markets this week

In the upcoming week, investors will be closely watching the inflation report for March and several big bank earnings, which will mark the beginning of the earnings season. Financial giants such as JPMorgan Chase (NYSE: JPM) and BlackRock (NYSE: BLK) will report Q1 earnings on Wednesday, followed by Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) on Thursday.

The ongoing war in Ukraine will also remain in focus as Wall Street will follow any signs of new development in the region.

In an interview with CNBC, the chief equity strategist at LPL Financial, Quincy Krosby explained Q1 earnings report from companies part of the banking and finance sector will be critical to market participants given the Federal Reserve’s hawkish policy with plans to increase interest rates multiple times this year.

Krosby stated, “We want to get a picture of how do they see the Fed’s plan... quantitative tightening, the liquidity drain, coupled with higher rates, affecting their clients and their business units. If you look at the XLF [Financial Select Sector SPDR Fund ETF], on days it goes up, it’s the insurance companies because they’re raising premiums. Higher rates are good for banks, until, the belief is, the higher rates are going to hurt the economy.”

Additionally, the 10-year Treasury yield rates increased for the third consecutive week by at least 30 basis points and were around 2.7% on Friday. Interest rates have an inverse relationship to bond prices and the former moved higher in the last week as the Fed announced plans to trim its balance sheet by $95 billion, including $60 billion in Treasurys this month.

The Treasury yield is an important financial benchmark as the rate impacts the pricing of mortgages and other loans. Considering the generous uptick of the 10-year Treasury yield, there is a good chance for rates to move higher going forward.

Economic data will be a catalyst for the S&ampP 500

In addition to interest rates and earnings, economic data published in the upcoming week will be another driver of the S&ampP 500. The four-day week will see the consumer price report getting published on Tuesday. Economists expect the CPI for March to top 7.9% which was reported for the month of February.

The CPI will be an important data point before the Fed meets again in May 2022. Even if the CPI is in line with expectations, the Fed might increase rates by 50 basis points. The central bank increased interest rates by 0.25% for the first time after several years in March. The PPI or producer price index report is slated to release on Wednesday, while retail sales and consumer sentiment data are due on Thursday.

Investment bank Barclays expects CPI to rise by 1.24% in March after rising 8.5% year over year. The annual rate of CPI is estimated to peak in March and then trend lower driven by a few positive base effects.

Earnings remain key

Data from Refinitiv suggests S&ampP 500 earnings are forecast to rise by 6.1% year over year in Q1. Comparatively, earnings for companies part of the financial sector might decline by 22.9%.

In a nutshell, investors have to wrestle with interest rates hike, balance sheet reductions, and quantitative tightening measures in the near term.

So, it makes sense to increase exposure to defensive stocks or companies part of sectors such as consumer staples and healthcare, in addition to real estate investment trusts.

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