After a brutal month for equity investors in April, May kicks off with a slew of major market events that could further stoke volatility in risky assets.
One of the focal points this week will be the Federal Reserve’s May monetary policy meeting, which takes place on Tuesday and Wednesday. Market participants expect at the outcome of this meeting, central bank officials will choose to raise interest rates by 50 basis points, which is the first hike of more than 25 basis points since 2000. Investors also expect the Fed to formally announce its intention to start rolling assets off the central bank’s balance sheet, beginning the process of quantitative tightening.
Fed funds futures on Friday showed traders pricing in a more than 99% chance that the Fed would raise rates by 50 basis points, bringing the target range for the fed funds rate to between 0.75% and 1.00%.
The expectations came after weeks of remarks from key Fed officials, including Fed Chairman Jerome Powell and Fed Vice Chairman Lael Brainard, who suggested the Fed was warming to the prospect of raise rates more aggressively in the short term.
“We are really committed to using our tools to get inflation back to 2%,” Powell said during a public appearance with the International Monetary Fund earlier this month. “It’s appropriate, in my opinion, to move a little faster. And I also think there’s something about the idea of the initial load…that points the direction of 50 basis points on the table.
Such a move would accelerate the Fed’s trajectory toward reducing inflation, which has persisted for a longer period and at a higher rate than many monetary policymakers had originally anticipated. Last week, government data showed that core personal consumption expenditure (PCE) – the Fed’s preferred gauge of inflation – rose at an annual rate of 5.2% in March.
That nearly matches February’s rate for the fastest since 1983. And consumer prices climbed last month the most since December 1981 with an annual rise of 8.5%.
“They’re behind the curve – they know they’re behind the curve,” Jim Smigiel, Chief Investment Officer of SEI Investments, told Yahoo Finance Live last week. “We are at plus-8% on inflation and [the Fed funds rate] is a quarter point. They will arrive at 50 [basis points]. They’re going to do 50 again. And they’re going to start bashing the record.”
“From the Fed’s perspective, at this point they are willing to trade a little bit of GDP and a little bit of unemployment to bring the inflation rate down,” Smigiel added. “I think they feel like they’re stuck in a corner. Nothing happening today is going to throw them off course. They’re going to get there early and the guns will fire a little.”
At the same time, Powell also hinted that he believed the central bank would succeed in tightening monetary policy while maintaining economic expansion. Some experts, however, were more skeptical, especially after new data last week showed the US economy contracted at an annualized rate of 1.4% earlier this year.
“They’re between a rock and a hard place,” David Stryzewski, CEO of Sound Planning Group, told Yahoo Finance Live last week. “The two big things they have to defend against right now, inflation and then this balance between, we want low cost loans…because there are a lot of people trying to get mortgages. We We have a lot of our economy based on highly indebted companies, and it’s been so easy to refinance it.
“The Fed is late to the table trying to take some of that out and make some of those changes,” he added. “We were in such a strong economy. And it was really our time where we might have been able to do some of that tightening. So we’re a bit behind.”
Yet borrowing costs remain low on a historical basis, and consumers have consistently shown a general propensity to spend. The key question, however, remains whether this ultimately manages to continue as the cost of doing business rises along with interest rates and financial conditions tighten further.
“We think the risks of recession are low for now but high for 2023. The main risk is that inflation will remain elevated next year, forcing the Fed to hike until it hurts,” he said. wrote Ethan Harris, global economist at Bank of America, in a note Friday. “Besides inflation, investors should watch consumer spending, sentiment, labor supply and the start of the yield curve to gauge recession risks.”
April jobs report
The Labor Department’s latest monthly jobs report will round out the economic data package this week, offering an updated look at the strength of the labor market so far this year.
The report is due out on Friday and therefore will not be among the data points considered in the Fed’s deliberations earlier in the week. However, the data would likely have played only a marginal role in Fed decisions, even if it were available, given that the Fed shifted its priorities towards fighting inflation rather than maximizing inflation. employment in a labor market that has already shown many signs of strength.
Consensus economists expect nonfarm payrolls to rise by 391,000 in April, slowing slightly from March’s jump of 431,000. Unemployment is expected to improve further to 3.5%, which would match the February 2020 level for the lowest unemployment rate in around 50 years.
The average hourly wage – a closely watched indicator of whether rising wages are reinforcing a cycle of rising prices – is expected to rise 5.5% from last year, edging slightly from the annual rate of 5 .6% of March. Yet these wage gains have not kept pace with inflation, as consumer prices recently rose 8.5%.
Monday: S&P Global US Manufacturing PMI, April (59.7 expected, 59.7 in previous print); Construction spending, month over month, March (0.8% expected, 0.5% in February); ISM manufacturing, April (57.7 expected, 57.1 in March); ISM prices paid, April (87.1 in March); ISM new orders, April (53.8 in March); ISM Employment (56.3. in March)
Tuesday: Factory orders, March (1.2% expected, -0.5% in February); JOLTS Job Openings, March (1.1266 million in February); Durable Goods Orders, Final March (0.8% in previous print); Durable goods excluding transportation, final March (1.1% in previous print); Non-defence capital goods orders, excluding aircraft, end-March (1.0% in previous print); Shipments of non-defence capital goods excluding aircraft, final March (0.2% in previous print)
Wednesday: MBA mortgage application, week ended April 29 (-8.3% over the previous week); ADP Evolution of employment, April (360,000 expected, 455,000 in March); Trade balance, March (-$86.7 billion expected, -$89.2 billion in February); S&P Global US Services PMIM, April Final (54.7 in previous print); S&P Global US Composite PMI, April final (55.1 in previous print); FOMC monetary policy decision
Thusday: Challenger Job Cuts, Year-over-Year, April (-30.1% in March); Non-agricultural productivity, preliminary to 1Q (-2.3% expected, 6.6% in 4Q); Unit labor costs, preliminary Q1 (6.7% expected, 0.9% in Q4); Initial jobless claims, week ended April 30 (180,000 in previous week); Continuing claims, week ended April 23 (1.408 million in previous week)
Friday: Evolution of the non-agricultural wage bill, April (390,000 expected, 431,000 in March); Unemployment rate, April (3.6% expected, 3.6% in March); Average hourly earnings, month over month, April (0.4% expected, 0.4% in March); Labor force participation rate, April (62.5% forecast, 62.4% in March)
Before market open: Moody’s Corp. (MCO), ON Semiconductor Corp. (WE)
After market close: Clorox (CLX), Devon Energy (DVN), Diamondback Energy (FANG), MGM Resorts International (MGM), Avis Budget Group (CAR), Expedia (EXPE), Chegg (CHGG), ZoomInfo Technologies ( ZI)
Before trading: The Estee Lauder Co. (EL), Pfizer (PFE), Biogen (BIIB), Paramount Global (PARA), Hilton Worldwide Holdings (HLT), Molson Coors Beverage (TAP), Marathon Petroleum (MPC), KKR Inc .(KKR), S&P Global Inc.(SPGI)
After market close: Caesar’s Entertainment (CZR), Airbnb (ABNB), Starbucks (SBUX), Advanced Micro Devices (AMD), Paycom Software (PAYC), Skyworks Solutions (SWKS), Revolve Group (RVLV), Match Group ( MTCH), Lyft (LYFT)
Before Market Open: Wingstop (WING), AmerisourceBergen (ABC), CVS Health (CVS), Marriott International (MAR), Moderna (MRNA), Yum! Brands (YUM), Vulcan Materials Co. (VMC), Sinclair Broadcast Group (SBGI), Spirit Airlines (SAVE)
After market close: Booking Holdings (BKNG), GoDaddy (GDDY), Uber (UBER), Marathon Oil (MRO), Twilio (TWLO), Etsy (ETSY), TripAdvisor (TRIP)
Before Market Open: Zoetis (ZTS), ConacoPhillips (COP), Apollo Global Management (APO), Nikola (NKLA), Wayfair (W), Penn National Gaming (PENN), Royal Caribbean Cruises (RCL), SeaWorld Entertainment (SEAS), Datadog (DDOG), Crocs (CROX), Dominion Energy (D), Kellogg’s (K), Shopify (SHOP)
After market close: Block Inc. (SQ), Virgin Galactic Holdings (SPCE), DoorDash (DASH), Sweetgreen (SG), Opendoor Technologies (OPEN), Zillow Group (ZG), Luminar Technologies (LAZR), FuboTV ( FUBO), Live Nation Entertainment (LYV), Corsair Gaming (CRSR), Lucid Group (LCID)
Before trading: Under Armor (UAA), Cigna (CI), DraftKings (DKNG)
After grant: No notable reports scheduled for publication
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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