Bond Yields Drop & Equities Rise On Dovish Fed Commentary
Over the last seven days, U.S. equity markets dismissed a number of negative events in order to close the week out higher. Fed speak on Friday helped boost the markets. The Wall Street Journal reported that some Fed members are not certain that short-term interest rates should continue to move up so quickly. It’s a strange world we live in when the comments from one Fed official can move markets so erratically. We maintain our residence in the cautious camp when digesting incoming news about company earnings and costs. Whether it be JP Morgan’s Jamie Dimon, or Jeff Bezos of Amazon, many CEOs share a batten the hatches sentiment. Housing and commercial real estate are under tremendous pressure, oil is stubbornly high, and overall input costs continue to rise. Inflation will be with us longer than expected.
The Fed has hit the markets very hard with what will be four .75 basis point rate increases after the November meeting, within a very short time period. It takes a while for these hikes to make their way through the economy. Banks are seeing an unprecedented number of deposits leave their institutions. It is obvious that liquidity is being sucked out of the economy very quickly. Should the Fed continue with rate hikes at current levels, the likelihood of a financial accident may become all but certain. Therefore, slowing the pace of rate increases is probably wise.
Stay Calm, Stay Cautious, and Take The Market Week By Week.
Until the Fed slows the pace of rate hikes, or, we start to see some signs of easing inflation, both business and real estate activity will be light. It is going to take a moment for businesses and consumers to adjust to a higher-rate environment. Business values as well as real estate values will need space to adjust. The good news is with every passing month, we get closer to interest rates normalizing, and hopefully, inflation moderating. Again, we don’t see inflation dropping to 2% overnight, but gradually leveling off. Calmer bond and equity markets will spur housing demand and fuel consumer confidence.
One other positive note, public company earnings have beaten expectations. This report supports a strong U.S. economy despite those companies forecasting tougher times ahead. This is both good and bad, as the Fed may use these positive earnings to validate additional rate hikes. The Fed’s mixed messaging amongst Fed Governors presents many different outcomes. For this week, it was a dovish tilt on rate increases, and the market rejoiced.
