Take one glance at the headlines and it can feel pretty scary out there. “Inflation Soars over 8.5%”…“Inverted Yield Curve – Screaming Recession in 12 weeks.” Simply put, it can be exhausting to keep up with the conversation.
Below I try to cut through the noise and giving you the facts and, at times, my unabashed option.
This week I cover federal funds rate hikes, as well as, your weekly market & economic update.
Schedule a call with me HERE to learn more.
Warmly,
Mark Sauer
info@AllOneWealth.com
+1(310)355-8286
Federal Funds Target Rates
With inflation sky high, the Federal Reserve hopes to engineer a soft landing for the US economy. Normally, the Federal Reserve’s purpose is to give delicate nudges to the economic scales – creating balance and direction when necessary. Abandoning said method in 2020 – opting instead for the sledge hammer approach – the Fed increased the money supply over 40%, via stimulus packages, to prevent a recession due to Covid19 lock downs. Now, the Fed seeks to balance the scales through large interest rate hikes.
The irony here being, in an effort to prevent a recession the Fed printed trillions of dollars. Now, the Fed is forced to manufacture a recession in order to rebalance the inflationary monster they’ve created. Finessing their way to a rebalanced ecosystem will not be easy. Hold on to your hats folks.
With inflation now at 40-year highs and concerns of the Fed not acting soon enough, faster and steeper rate hikes appear to be an absolute certainty. Over the next three months Fed futures are estimating bumps of 50-basis points in May, 75-basis point in June, and another 50-basis points in July – bringing the target rate to 200-225 basis points by August. A dramatic increase from where we started the year: near zero.
CME Group Probability of Interest Rate Hikes & Correlating Dates:
Weekly Market Update
- Global Equities: Markets experienced turbulence following the long holiday weekend. Federal Reserve Chairman Jerome Powell stated on Thursday that a 50-basis point hike is on the table for May. What started out as a decent week quickly reversed as the S&P 500 dropped -2.7%, the Nasdaq Composite dipped -3.8%, and the Dow Jones Industrial Average fell -1.8%. The S&P hit a wall at the 200-day moving average and then proceeded to break down, below support at the 50-day moving average, a massive bearish signal. Conversely, the Nasdaq found its way to the 500-day moving average – which could act as solid support for the market until we see further systemic, macro-economic issues. Developed International markets were also lower on the week, down -2.2%, while Emerging Markets lost -4.2%.
- Fixed Income: 10-Year Treasury yields hit levels that have not been seen since the end of 2018, reaching 2.95% on Thursday, and ending the week at 2.9%. High yield bonds followed equities and were down in weekly trading, -1.2%. Investment grade bond funds had outflows of $3.59 billion and high yield bond outflows were $886 million during the weekly period ended April 20th.
- Commodities: Oil prices settled back around $102, a decline of roughly $4 after the IMF warned of weaker global growth. US drillers added 2 active oil and gas rigs during the week, bringing the total count to 695, according to Baker Hughes.
Weekly Economic Update
- Hawkish Fed:Federal Reserve Chairman Jerome Powell dropped the hammer on the markets with his comments regarding aggressive rate hikes as soon as next month, stating a 50-basis point hike is on the table for May. Market odds of a 50-basis point hike are now 99.9 percent, per CME Group. But a shift in June rate-hike expectations is what sent markets in a tailspin, as the odds 1 week ago for an additional 50-basis point hike were 65%. As of Friday, the market is now anticipating a 75-basis point hike in June, with odds of 94%, up from only 28% 1 week ago.
- Housing Data:While 30-yr mortgage rates are now over 5% some thought that this would throw some water on the smoking hot housing market, however new housing starts and building permits say otherwise. New housing starts outpaced expectations and hit a new high over the last year. Building permits, a gauge of future new housing starts, were also at the high end. Record low housing supply might be contributing to these numbers as home buyers pursue new construction rather than scouring the market for their perfect home. With interest rates expected to increase, some buyers may be scrambling to lock in now or risk losing even more purchasing power later due to higher borrowing costs. Regardless, the assumption is that housing prices should start come down or at least hold steady in the short to medium-term with continued rate hikes coming down the pipeline.
- Earnings Update:Several well-known companies reported earnings this week such as Netflix (NFLX), Tesla (TSLA), International Business Machine Corp. (IBM), and American Airlines (AAL) just to name a few. Headlines were dominated by Netflix and Tesla. Netflix dropped -35% when reporting it lost 200k subscribers and markets anticipate that the number will worsen in Q2 due to increased competition. Tesla reported fantastic numbers, sending shares 6% higher in afterhours trading. Tesla’s automotive revenue was up 87% from the same period last year and the electric vehicle maker posted an EPS of $3.22 vs the analyst estimated $2.26.
Market Data Source: Halon Investment Management
