Rate Hikes and The Fed
The Federal Reserve is fully expected to raise interest rates when they meet on Tuesday and Wednesday. They’re planning to announce their decision late Wednesday. There was some concern last week when we got a negative GDP print, which came in well below expectations. We were expecting growth, maybe not robust growth, but still positive growth. When people saw the negative GDP, they started speculating that maybe the Fed won’t have to be as aggressive because the economy is slowing and may reduce inflation. The trouble is that the negative GDP print, when you look under the hood, really wasn’t that bad. Consumer spending was positive along with positive corporate spending. If you have a positive consumer and a positive corporate America, how could you have a negative GDP? The answer to that is trade. Our net trade withdrew 3.2 percentage points from GDP. That means we bought more than we sold, quarter-over-quarter and year-over-year. This shows more of an indication of weakness abroad and shows that the US is very strong. That makes sense because if you look, you will see that Europe is very weak right now. You also have what’s going on with Russia and the Ukraine as well as China is in the middle of a rolling lockdown. It makes sense that the US economy, if you look at the US consumer and US corporation, is very strong. Our net trade is ultimately what drove down GDP. The Fed may look at that as a negative GDP quarter but more of an anomaly, and still be able to be hawkish. The markets are predicting that the Fed will be very aggressive by raising rates by at least 50 basis points at their meeting this week. That will be the first 50 basis point hike in over 20 years. This is something that doesn’t happen very often and the reason they’ll be doing that is to try and slow the economy down. They are trying to slow inflation down which is the Fed’s big focus. At the end of week, we’ll get the jobs data, which is will be another huge point, but the Fed is what the markets are watching this week very closely for. The news media is going to be speculating how many interests rate hikes that they going to do, and they can get extreme on that. Everyone expects 50 basis points and the market is currently expecting another 50 basis points in June. The Fed has been the biggest driver of inflation by generating a large amount of new money to prevent the crisis from getting worse. We’re through the crisis, and now the Fed is in the policy of seeing how they can remove that excess stimulus and how quickly. Where the Fed guides us going forward is really what the markets are looking at. It’s not looking at what they’re doing today, but how dogmatic they’ll be going forward to their preset plans. The market is pricing in 10 rate hikes this year and that would be a very aggressive Federal Reserve. Especially even though GDP wasn’t really negative when you look under the hood, it definitely was not a robust GDP report last week. Something we’re balancing is the real economy versus the financial economy versus what the Fed is looking at. There’s a lot of plates in the air, right now, that we are trying to balance.
We met with one of our leading research partners this past week, and one area that they seemed focused on that doesn’t get a lot of notoriety is the money supply report which came out on Tuesday. How you can think about it is using this example. Let’s say our economy had $10 in it and 10 apples. Each apple is worth $1. If suddenly, they raised money supply by 50% you now have $15 there and only 10 apples, that means every apple is going to be $1.50. That’s kind of an inflation story with money supply. Around 40% of the dollars in circulation currently have only been in circulation since the pandemic. That’s a huge increase and one of the reasons we’re now seeing some inflation. Luckily, we got the report on Tuesday and we’re actually seeing a dip. As you can see in the chart shown in the video for this episode, we peaked in January on money supply and are coming back down, so they’re starting to take some money back out of the economy, which is good news. On another chart, you can see, typically a leading indicator of inflation, money supply growth really peaked in 2021 and at the beginning of 2022. It’s been around a six-month lag for inflation and now inflation is starting to pick up. Now that we’re drawing down, hopefully in the next few months we can start seeing some peak inflation that everyone keeps mentioning but only time will tell.
We saw volatility really ramp up last week in the overall markets with all 11 sectors on Friday being down more than 2%. The S&P 500 closed on Friday at a price of 4,131. That gives us a new short-term resistance level of 4,170 and a new support level of 4,100. Also, we saw unique event take place with the S&P 500 100-day and 200-day moving averages both pricing at 4,492. The topics of GDP, the Fed, and money supply are all economic headlines that we’re really looking at as we test the short-term support levels, along with the intermediate and long-term support and resistance levels. There will be several big headlines to look at this week as we continue to follow these patterns.
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