Allen Pierce Equity Partners


Opinion and insights on some of the latest events in the corporate and business worlds, the world financial markets, and the movers and shakers who pull the strings.

Allen Pierce Equity Partners
Allen Pierce Equity Partners Insights

Powell to raise rates

The Federal Reserve's two-day meeting will likely be the highlight of the upcoming week, with everyone waiting to see what clues the Fed gives about future rate rises. Expectations are of a half-point increase this month, followed by the same in July.

Still, Friday's scorching consumer inflation report sparked thoughts that raises could be faster and higher. Markets are worried about a recession, so equity investors are watching the bond market for signals that the economy could further weaken.

Federal Reserve Chair Jerome Powell will brief the press at the conclusion of the central bank's two-day meeting after releasing new economic and interest rate forecasts. But his views about summer and autumn rate increases could help set the path for a bumpy road ahead in the financial markets. Stocks and bonds have been volatile on fears that inflation may not yet be at its peak and that rate hikes could catalyze recession.

The key issues surround what Powell talks about during the conference and whether he gives any solid guidance for September. Data indicated the fed funds futures market reflected a hike of 56 basis points for Wednesday.

After Friday's consumer price index numbers for May were released, stocks plummeted, with the S&P 500 ending the week down 5.2%, finishing Friday's trading lower by 2.8%.

The markets want clear and decisive evidence that the Fed can produce some magic without causing a recession, but the markets will take their cues from the data.

With worries over inflation and a possible recession already factored in, Friday's inflation report only added to existing fears for equities. The Consumer Price Index rose 8.7% year over year, well above the 8.2% expected by economists.

That also added fuel to the fire about whether the Fed will consider a three-quarter of a percentage point rate hike and continue at a faster speed. Several investment firms, including Barclays, updated their forecasts to account for a 75-basis point hike this week, though many other economists still predict half of one point.

Jerome Powell indicated that he wants to steer expectations rather than announce surprises, and with almost no appetite for upside surprises, the plans seem set for a hike next week of 50bp.

Like most, we await Powell's remarks but do not expect any major surprises. However, there is encouragement that some Fed officials appear willing to raise rates faster earlier in the year, allowing some flexibility for later.

In addition to the Fed, a few important economic reports are coming out next week, including the (PPI) on Tuesday reflecting price changes received by producers, retail sales Wednesday, housing Thursday, and industrial production Friday. All four reports are for May.

Oracle is one of just a small number of corporate earnings set to be announced this week.

Treasury yields rose after the hot inflation report, but the yield curve also flattened. That means shorter duration yields, like the 2-year, grew closer to longer duration yields, like the 10-year. On Friday, the 2-year Treasury yield hit 3.07%, and the spread was only ten basis points. If the 2-year were to move above the 10-year yield, the curve would be inverted, which is an indicator of being in a recession.

The stock market is factoring in only a shallow recession for now. The S&P 500 has dropped an average of over 30% in more traditional recessions and has already been down close to 20% in this cycle.

Analysts believe there's a 55% chance the market has already set a bottom, with valuations now reasonable enough that you can grab your shopping list and pick up the stocks you've been waiting for.