As we start a new trading day, it appears that yesterday’s stock rally may not continue. Notably, futures gave up their overnight gains after Russia said that reports of progress in peace talks with Ukraine were incorrect.
Also, this morning’s Jobs report from the Department of labor was slightly ahead of expectations. Initial claims fell by 15,000 versus the prior week, to 214,000 (versus a consensus estimate of 220,000). Continuing claims came in at 1.419 million, compared to 1.494 the week before and expectations of 1.48 million. Also, the seasonally adjusted rate for housing starts picked up in February, to 1.77 million (versus 1.64 the month before). Meanwhile, building permits, which are a more forward looking indicator, increased 6.8%, to 1.77 million from revised figures from the previous month. Year over year, the figure was up 22%.
All this re-emphasizes that the U.S. Federal Reserve is likely to remain resolute on using monetary policy to fight inflation, given the continuing strength of the economy here.
So far today, stocks in Asia closed with significant increases, but trading in Europe has been mixed. On our shores, futures are indicating a slightly negative open for equities, while oil has jumped 5.6%, to around $100.35 a barrel.
Meanwhile, investors are still digesting and working out the implications of yesterday’s Fed announcement. In a widely anticipated move, the Federal Reserve announced that it was raising its overnight lending rate by a quarter percentage point, marking the first increase in over three years. However, the lead bank laid out a very clear roadmap for its plans well into 2023 that took some investors by surprise. Specifically, officials indicated that they were aiming for quarter-point increases for each of the next six meetings in 2022. This would lift the overnight Fed funds rate to around 1.9% by the end of the year. Moreover, the committee is targeting three additional increases in 2023. The last time the markets saw anything near the 2% mark was in late July of 2019. Still, it would be a far cry from the 6.0% peak of the last two decades, which occurred in January of 2001.
Also, the central bank indicated that it would begin reducing the nearly $9 trillion it holds in mortgage-backed securities and Treasuries. This trend will tend to lift long-term interest rates. In its quarterly economic growth projection, the Fed is now looking for Gross Domestic Product (GDP) to clock in at 2.8%, versus the 4% it estimated in December of 2021.
It also acknowledged that the outlook for inflation was much higher than originally anticipated. The Federal Reserve is now looking for consumer prices (excluding food and energy) to rise about 4.1% this year, versus the previous call of 2.7%. Ironically enough, while the Fed is raising rates to help tame inflation, its announcement may have the opposite effect, at least in the housing market. Specifically, home prices will likely spike, at least temporarily, as would-be buyers race to close on deals as rates gradually ratchet higher.
Inflation was already hovering around a 40-year high, prior to Russia’s invasion of Ukraine. Developments since then suggest high prices could linger, and that further, or more aggressive tightening may be needed by the Fed, raising the risk of derailing the economic recovery.
Yesterday’s see-saw session served to illustrate just how sensitive the markets have been of late. Stocks started the day strongly in positive territory, following reports of progress on a peace plan between Ukraine and Russia. At one point, the Dow Jones Industrial Average was ahead by 1.6%, but then gave it all back following the Fed’s announcement. After the initial surprise, it appeared that traders were encouraged by the Fed’s clear roadmap for further increases, fueling a late afternoon rally. Between the high and low points for the day, the Dow Jones Industrial Average swung more than 680 points, or roughly 2%.
After all the dust had settled, the Dow closed with a gain of 1.6%, the S&P 500 stock index ended up 2.2%, and the tech-heavy NASDAQ led the pack with a 3.8% advance. Performance among the major market sectors was led by consumer discretionary (up 3.4%), technology (+3.3%) and communication services (+2.9%). Stocks in Europe also posted solid gains, while oil prices eased about 1.1%.
Tomorrow brings us the February figures for existing home sales, where a dip to 6.13 million (versus last month’s 6.50) is expected, as well as the Index of Leading Economic Indicators for last month.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
