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Turbulent Markets as Fed Aims for Soft Landing

By Jack Kraft, CFA, Advisor Directed Portfolio Analyst

U.S. stocks tumbled lower in a volatile week of trading as investors digested key economic updates, earnings reports, and commentary from the Federal Reserve. The S&P 500 began the week on a positive note, rallying more than 1.5% through Wednesday before ultimately marching lower as investors took a perceived risk-off tone toward stocks. In fact, the Dow tumbled more than 900 points Friday, suffering its worst one-day decline since October 2020 and its fourth consecutive week in the red. Elsewhere, the U.S. Treasury yield curve flattened amid hawkish commentary about future rate hikes from the Federal Reserve. The two-year note jumped 27 basis points, while the five-year note briefly crossed 3.0% before moving back down. In commodities, WTI crude faced pressured slipping more than 4.5% on the week as China lockdowns dampened demand outlook.

Last week’s decline in stocks can be partially attributed to hawkish commentary from both the European Central Bank and the Federal Reserve. During an International Monetary Fund (IMF) panel, Fed Chairman Jerome Powell indicated that a 50-basis point rate hike is on the table. Although a 50-basis point increase was already the consensus according to the CME group for the May meeting, Powell’s comments opened the discussion for a 75-basis point hike in future meetings. The last 75-basis-point hike was in 1994 and remains unlikely with conflicting commentary from Federal Reserve presidents on the topic.

As the Fed becomes more aggressive with rate increases on the front end, there has been increased noise about a “soft” or “hard” landing. Currently, one of the tougher challenges the Fed is facing is to slow wage growth to a consistent pace in line with its long-term inflation goals and without sending the U.S. into a recession, which is referred to as a hard landing. The Atlanta Fed’s wage growth tracker showed median hourly wages were up 6% over than past 12 months in March. A key indicator for wage growth is the jobs-worker gap (the difference between the total number of jobs and the number of workers in the workforce). Currently, this gap is the widest in over 50 years with job openings outpacing workers in the workforce.

Earnings season remains in focus with roughly 20% of S&P 500 companies issuing profit tallies through Friday. According to FactSet, 79% of companies reported first-quarter results that have exceeded expectations, slightly down from the one-year average of 83%. Furthermore, companies that are surpassing expectations are doing so by a tighter margin. Positive EPS surprise rates have averaged 8.1%, below the 14.1% one-year average. Despite it still being relatively early in earnings season, a few themes have stuck out to analysts. Several companies across different industries have highlighted a solid macro/demand backdrop amid strong consumer and corporate balance sheets. Elsewhere, Bank of America struck an optimistic tone, noting loosening labor conditions among more labor-intensive companies. A trend, if it continues, could mark a relief for wage inflation, which would ultimately help bring down input costs given labor is one of the most expensive cost components.

This coming week will be jam packed with corporate earnings reports as more than 160 S&P 500 constituents prepare to issue results. Market participants will listen closely with some of the largest companies in the world measured by market cap slated to report first-quarter results. Also in focus is a busy economic calendar with typical month-end reports as April comes to a close. Headlining the calendar will be an update on GDP that is expected to show the U.S. economy expanded at a 0.8% pace in the first quarter, much lower than the 6.9% increase in the prior quarter. Meanwhile, on Friday, the Federal Reserve will keep an eye on its preferred proxy for inflation with the March Personal Consumption Expenditures (PCE) price index expected to show an increase of 6.7% year-over-year. Other important economic data to watch will be the Michigan Consumer sentiment report (Friday), Conference Board Consumer Confidence (Tuesday), and the S&&P Case-Shiller U.S. home price index (Tuesday).

TIME (ET) REPORT PERIOD MEDIAN FORECAST PREVIOUS
MONDAY, APRIL 25

None scheduled

TUESDAY, APRIL 26
8:30 AM

Durable goods orders

March

1.00%

-2.10%

9 AM

S&P Case-Shiller U.S. home price index (year-over-year)

Feb.

19.20%

10AM Consumer confidence index

April

108

107.2

10 AM New home sales (SAAR)

March

776,000

772,000

WEDNESDAY, APRIL 27
10 AM Pending home sales index

March

-1.50%

-4.10%

10 AM Home ownership rate (NSA)

Q1

65.50%

THURSDAY, APRIL 28
8:30 AM Initial jobless claims

23-Apr

180,000

184,000

8:30 AM Real gross domestic product (SAAR) (first estimate)

Q1

0.80%

6.90%

8:30 AM Real final sales of domestic product (SAAR) (first estimate)

Q1

1.50%

FRIDAY, APRIL 29
8:30 AM PCE price index

March

0.60%

8:30 AM Core PCE price index

March

0.30%

0.40%

8:30 AM PCE price index (year-over-year)

March

6.40%

8:30 AM Core PCE price index (year-over-year)

March

5.30%

5.40%

8:30 AM Nominal personal income

March

0.40%

0.50%

8:30 AM Nominal consumer spending

March

0.80%

0.20%

8:30 AM Real disposable incomes

March

-0.20%

8:30 AM Real consumer spending

March

-0.40%

10 AM U. Mich consumer sentiment index (final)

April

65.7

65.7

10 AM U. Mich 5-year inflation expectations

April

3.00%

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.