Market Brief: There’s Good News in Fed Rate Hikes

The first four months of 2022 have been very difficult for investors. Stocks and bonds are posting steep losses, largely due to the Federal Reserve shifting gears to a much, much more aggressive path to raising interest rates to calm the economy and bring inflation under control .

The Federal Open Market Committee responsible for setting central bank policy will hold its next meeting next week. Fed Chairman Jerome Powell has signaled that a 0.50 percentage point hike in the federal funds rate is a likely outcome. This kind of movement is rare: it has been 22 years since the last rate hike of half a point. Bond futures are also signaling that a 0.75 percentage point rise could be on the way in June. The last time rates were hiked this much was in 1994.

While expectations for these kinds of aggressive rate hikes have been responsible for the red in investors’ portfolios, all is not bad, says Ashish Shah, chief investment officer for public investments at Goldman Sachs Asset Management.

“We’ve been cashless for two years now, and you’re finally going to start earning cash in money market accounts and money market funds,” Shah says. While talk is all about how the Fed will raise the funds rate, financial markets have preceded the Fed in offering higher yields.

For example, 2-year US Treasury bills are now yielding 2.7% and 6-month US Treasury bills are yielding 1.4%. Meanwhile, the 7-day average return for taxable money market funds is 0.13%, according to Morningstar Direct.

And with the Fed embarking on an aggressive series of interest rate hikes, even cash accounts could return nearly 2% in just a few months. “By the end of the summer, the pricing environment is going to be completely different,” Shah says. “For people with cash, it’s time to take a look at that cash and consider where to get the best rates.”

For markets, one of the keys to next week’s FOMC meeting will be Powell’s assessment of the inflation outlook. A worrying sign came Friday with the release of the Fed’s favorite inflation indicator, the Commerce Department’s Personal Consumption Expenditures Price Index. The report showed consumer prices rose 6.6% in March from a year earlier, and up from February’s revised 6.3% increase. The March increase was the fastest since January 1982.

Jan Nevruzi, strategist at Natwest Markets, says the 0.5 percentage point hike in the funds rate appears to be set in stone, along with details from the Fed on how it plans to reduce its bond holdings which were bought as a way to keep rates low and support the economy during the pandemic-triggered recession.

But the direction the Fed takes going forward will depend on how confident it is in the outlook for inflation, Nevruzi says. “How Convinced Is Powell That Inflation Has Peaked?” said Nevruzi. And from there, how confident is the Fed that inflation will fall significantly by the end of the year? “If inflation doesn’t end up coming down, they will further accelerate the pace of tightening.”

In addition to the FOMC meeting, the week will also bring the latest labor market reading, another factor in the Fed’s push to raise interest rates. The US economy is expected to have added 375,000 jobs in April, following an increase of 431,000 reported for March.

Events scheduled for the coming week include:

  • Tuesday: Pfizer (EFP) and primordial (PARA) report earnings. The Federal Reserve meeting begins.
  • Wednesday: Uber (UBER) and energy transfer (HEY) report earnings. The Federal Reserve meeting ends.
  • Thursday: Oil Marathon (MRO) report earnings.
  • Friday: Bureau of Labor Statistics will release April employment data.

For the trading week ending April 29:

  • The Morningstar US Market Index fell 3.32%.
  • The best performing sector was Basic Materials, but still fell 1.06%.
  • The worst performing sector was Consumer Discretionary, down 6.59% and Real Estate down 5.19%.
  • Yields on 10-year US Treasuries fell slightly to 2.89% from 2.90%.
  • Oil prices rose $2.62 to $104.69 a barrel.
  • Of the 868 U.S.-listed companies covered by Morningstar, 155, or 18%, rose and 713, or 82%, fell.

Which stocks are rising?

Top performers last week were Pinduoduo (PDD)New Eastern Education and Technology (EDU)NLP training (TAL) (JD)and PTC (PTC).

ADR-listed Chinese stocks rallied after regulators prepared to slow down their campaign against tech companies, The Wall Street Journal reported. Shares of Pinduoduo, New Oriental Education & Technology, TAL Education,, Alibaba (BABA)and Baidu (BIDU) rallied on Friday in response.

Strong earnings results also boosted PTC, Sherwin-Williams (SHW)Avnet (VAT)and Mattel (RUG). Mattel has been in talks with private equity firms and may go private, the Journal reported.

Metaplatforms (FB) shares surged despite posting mixed results. The social media company reported revenue below expectations, but saw an increase in active users.

Which stocks are down?

Last week’s worst performers were Teledoc Health (TDOC)bed bath and beyond (BBBY)Alnylam Pharmaceuticals (ALNI)Align Technology (ALGN)and Altice USA (OURS).

Healthcare stocks led losses, shares of Teledoc tumbled after the company cut its 2022 outlook, and first-quarter revenue and earnings per share (EPS) missed Wall Street estimates. Alnylam Pharmaceuticals and Align Technology also closed lower after missing revenue and EPS estimates.

Amazon (AMZN) slipped after the company reported losses for the first time in seven years. The online retail giant also released a lower-than-expected second-quarter guidance.

You’re here (TSLA) refused after CEO and founder Elon Musk and Twitter (TWTR) reached an agreement to privatize the social media company. The deal is partially funded by a margin loan, which can potentially force Musk to sell Tesla stock if its stock price were to rise above a certain level.

About Mark A. Tomlin

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