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Daily Market Update: Ready, Set, Rate Hike

Daily Market Update: Ready, Set, Rate Hike

| May 04, 2022
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  • The Federal Reserve (Fed) concludes its two-day meeting today where the Committee is widely expected to raise the Fed funds rate by 50 basis points (0.50%), which would take the rate’s upper bound to 1.00%.
  • Additionally, the Committee is expected to formally outline plans to begin to reduce its nearly $9 trillion of Treasury and mortgage securities, which is likely to begin soon.
  • Markets have largely repriced the expected Fed rate hikes for the year with Treasury yields rising by 100 to 200 basis points already this year—the biggest jump in yields in decades.
  • Recent economic data has weakened some, so how strong the economy is in the eyes of the Fed will be important, as they saw a strong economy at the last meeting.
  • As always, the Q&A will be important and could provide some afternoon volatility. 

U.S. Markets Open Higher Ahead of Today’s Federal Reserve Meeting

  • Market participants will be awaiting comments from the Fed after today’s expected rate hike.
  • West Texas Intermediate crude oil opened over 4% higher at just under $107 a barrel.
  • European markets are lower through midday trading as the EU proposes a phased oil embargo on Russia.
  • Asian markets finished mixed as Shanghai authorities allow manufacturers to resume production.  

Things You Should Know but Might Not

  • We all know the major worries and concerns out there, but there are some things that most investors might not be aware of.
  • For instance, looking at some of the worst starts to a year for stocks shows the final eight months tends to have a larger than normal bounce back.
  • Additionally, the Federal Reserve Bank (Fed) is set to hike again today, but did you know that stocks have done quite well during previous periods of hikes?
  • Also, you can have a bear market without a recession (remember, we don’t think we’ll see a recession in 2022), but it is quite rare, with 1987 being the last time it happened.
  • Lastly, as shown in the table below, previous stock market corrections ended near current levels and duration. No one knows when this one will end, but it’s something we should be thinking about.

Fed Concerned That the Economy Has Twice the Number of Job Openings Per Unemployed Person

  • The labor market is still very tight, increasing the risk of wage inflation in the near term.
  • Quit rates are high, revealing that workers in many industries know they can likely get higher wages if they move from one firm to another.
  • Churn is especially high in construction and leisure and hospitality sectors as workers chase higher paychecks.
  • Job openings remain elevated, showing us that businesses are having trouble attracting and retaining workers.
  • Quits rate in construction is elevated, roughly matching the all-time high rate in 2005.

Oil Exploration Still Strong

  • Energy stocks continue to do quite well and few groups are as strong as oil exploration and production.
  • The Dow Jones U.S. Select Oil Exploration and Production Index recently pulled back to its 50-day moving average, where buyers stepped in.
  • Relative strength versus the S&P 500 Index made another new high, suggesting underlying strength and likely continued higher prices in the intermediate-term.
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