Fed Turns Dour Again

The stock market is up an astounding 7% so far this year as sentiment improves and investors look forward to two likely catalysts this year: disinflation and the end of Federal Reserve rate hikes. But of course we’re not out of the woods quite yet with regard to market volatility. This morning stocks gapped up at the open but quickly lost steam. Currently, the Dow is down 80 points and the S&P 500 is down .25%.

Bonds are taking a hit this month as interest rates resume their upward trajectory. Part of the reason for that is what they call “Fedspeak.” Federal Reserve officials, in speeches and press conferences, continue to press home the idea that interest rates are headed higher yet in 2023. Over the past couple of weeks Fed funds futures have priced-in the expectation for another .25% rate hike. The Fed’s current policy rate target is 4.75%, and bond traders currently predict it will rise to 5.15% over the next few months. This is probably not a big deal, but if we’re all wrong and the Fed’s terminal rate is something around 6%, we can expect more downside volatility in both stocks and bonds.

The latest job market data suggest continued resilience. Last week’s Employment Situation Report was far hotter than expected, with payrolls up over 500,000 in January and an upward revision for December. Today we learned that weekly unemployment insurance claims remain below average. In fact, the four-week average of new claims fell to its lowest level since April of last year. And the total number of people receiving unemployment benefits is about equal with 2019’s average. Despite high profile layoff announcements from companies like Microsoft and Amazon, economists at Bloomberg “foresee only a modest rise in layoffs over the near term with job cuts contained to a limited number of sectors.” And anyway, “laid off workers continue to find new jobs relatively quickly.” The Federal Reserve would like to see the labor market soften up a bit, but so far that hasn’t happened. Maybe that’s why Fedspeak is turning negative again.