Every Word That Proceedeth From The Mouth Of The Fed Chair

Stocks opened mixed this morning, anticipating the Federal Reserve’s policy announcement this afternoon. At the moment, the Dow is up 88 points; S&P 500 +.2 %; Nasdaq -.3%. Expect a lot of volatility today.

This year we’ve seen a broad re-pricing of assets as investors anticipate removal of both fiscal & monetary stimulus. The bond market has arguably been hit even harder than the stock market. For example, the iShares 20+ Year Treasury Bond fund (TLT) is now down 20% year-to-date. The 2-year US Treasury Note yield, which more closely follows Federal Reserve rate hike expectations, is up around 2.8% from .73% at the beginning of the year. Clearly, investors have taken the Fed’s words to heart. And today we’ll see whether the market has already built in enough pain. The Fed’s key policy committee (Federal Open Market Committee) will likely announce not only a .5% short-term rate hike, but also commencement of a bond selling program that will drive long-term rates higher. Bloomberg News calls this an “historic decision,” which is probably too dramatic. But professional investors will pay close attention to every word that proceedeth from the mouth of the Fed chairman.

I’ll summarize the raft of economic data published over the last couple of days. First, the US trade deficit is sitting at record levels due to surging demand for imports. US exports rose 5.6% in March, but imports climbed at nearly twice that rate. A few of key drivers: petroleum imports rose to the highest level since 2014, industrial supplies imports are at 14-year highs, and it’s clear many more Americans are traveling abroad. Second, US business activity is slowing somewhat. ISM’s Services Index fell to 57.1 in April from 58.3 in the prior month. The firm’s Manufacturing Index sank to 55.4. Business activity is still growing, but at a slower rate. And it looks like slower hiring activity is at least partly to blame. Job openings are at record levels, far outpacing the number of unemployed. We need more people to enter the labor force. At this point, a shortage of labor is sort of holding back the economy, as are ongoing supply chain delays. As I’ve said repeatedly, this isn’t a demand problem but rather a supply problem.

Starbucks (SBUX) reported first quarter results in line with Wall Street forecasts. But while total sales grew 15% from the year-ago quarter, operating earnings per share fell 5% on higher commodity & labor costs. The company’s CEO plans to spend another $200mil on higher wages and better employee training. This initiative is in part due to a unionization movement gaining steam within the workforce. The good news, however, is that demand, especially in the US, is strong. Global same-store sales—for all stores open at least a year—rose 7%, propped up by 12% domestic growth. China sales fell more than 20% due to Covid shutdowns, but that’s hopefully temporary.