After a brutal month for equity investors in April, May kicks off with a slew of major market events that could further fuel volatility in risk assets.
One of the focal points this week will be the Federal Reserve’s monetary policy meeting in May, 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.
From Friday, Fed funds futures showed traders pricing in a greater than 99% chance that the Fed will raise rates by 50 basis points, bringing the target range for the fed funds rate between 0.75% and 1.00%.
Those expectations came after weeks of remarks from key Fed officials, including Fed Chairman Jerome Powell and Fed Vice Chairman Lael Brainard, who have suggested the Fed was warming to the idea of raising rates more aggressively in the short term.
“We’re really committed to using our tools to recoup 2% inflation,” Powell said. said during a public appearance with the International Monetary Fund earlier this month.“In my opinion, it is necessary to go 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 by the the most since December 1981 with an annual increase 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 more. And they’re going to start flouting the balance sheet.
“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 that happens today will deflect them from their trajectory. They will arrive early and the guns will flare up a bit.
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 to a 1.4% annualized rate at the start of this year.
“They are between rock and hard,” 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. Much of our economy is based on highly indebted companies. And it was 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 that was really our time where maybe we could have done some of that crunch. So we’re a bit late.
Yet borrowing costs remain low on a historical basis, and consumers have always 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 trading: The Estee Lauder Co. (EL), Pfizer (DFP), Biogen (BIIB), Paramount Global (PARA), Hilton Worldwide Holdings (HLT), Molson Coors Beverages (FAUCET), Oil Marathon (MPC), KKR Inc. (KKR), S&P Global Inc. (SPGI)
After market: Caesar’s Entertainment (CZR), Airbnb (ABNB), Starbucks (SBUX), Advanced micro-systems (AMD), Paycom software (PAYC), Skyworks Solutions (SWKS), Revolution group (RVLV), Match Group (MTCH), Lyft (LYFT)
Before trading: Wingstop (WING), AmerisourceBergen (ABC), CVS Health (SVC), Marriott International (MAR), Modern (mRNA), Yum! Brands (YUM), Vulcan Materials Co. (VMC), Sinclair Broadcasting Group (SBGI), Spirit Airlines (TO SAFEGUARD)
Before trading: Zoetis (ZTS), Conaco Phillips (COP), Apollo Global Management (APO), Nicholas (NKLA), Wayfair (O), Penn National Gaming (PENN), Royal Caribbean Cruises (RLC), Sea World Entertainment (SEAS), Data Dog (DDOG), Crocodile (CROSS), Dominion Energy (D), Kellogg’s (K), Shopify (STORE)
After market: Block Inc. (SQ), Virgin Galactic Holdings (SPCE), DoorDash(HYPHEN), Sweetgreen (SG), Opendoor Technologies (TO OPEN), Zillow Group (ZG), Luminar Technologies (LAZR), FuboTV (FUBO), Live Nation Entertainment (LYV), Corsair Gaming (CRSR), Lucid Group (LCID)
After grant: No notable reports scheduled for publication
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck