The markets continued to watch two situations, one being the ongoing Russian invasion of Ukraine and the other the Federal Reserve. The situation in Ukraine continues to be a focal point for the market, and there has been no further progress to a peaceful solution.
The major market indexes were positive for a second straight week. The S&P 500 and NASDAQ gained approximately 2 percent, while the DJIA rose 0.3 percent. All three are still negative for the year. The Chicago Board of Options Volatility Index dropped again to close the week at 20.81.
Federal Reserve Chairman Jerome Powell said that they are prepared to act more aggressively when it comes to withdrawing support for the economy to bring soaring inflation under control. He indicated the Fed could soon push rates at relatively high levels in order to slow demand and temper inflation, which is now moving at its fastest pace since the early 1980s. These comments are the most direct statements yet that the Federal Reserve is ready to act more forcefully to attack inflation.
As far as the Federal Reserve is concerned, it is all about fighting inflation at this point. The Fed funds futures are now moving higher for May and June. They are currently predicting a 73 percent chance of a 50-basis point increase in May and a 63 percent chance of another 50 basis point increase in June. July is still pricing in a 25-basis point increase.
Still, some economists had differing views, believing the Fed can raise rates all they want, but until the supply chain is fixed, it won’t do any good curbing inflation. If demand remains high and the supply chain is still lagging, prices will continue to climb. In addition to supply chain issues, the labor shortage continues to slow the supply chain. Businesses continue to report that they are having problems hiring enough workers.
The continuing war in Ukraine and sanctions on Russia are also having a secondary effect on the global supply chain. Taking Russia and Ukraine out of the global markets could have significant impacts on energy, rare earth minerals and wheat. Wheat could affect global food supplies, and raw minerals could add to the current shortage of semiconductors.
On a positive note, the U.S. economy is still growing at its most rapid pace in decades. On Thursday, March 24, the initial jobless claims fell to the lowest level since 1969, with a decrease of 28,000 to 187,000 initial claims. This figure was well below the estimate of 210,000 initial claims. Chairman Powell described this labor market as being tight to an unhealthy level. There are millions of job openings currently along with historically low unemployment levels. Employers are having a hard time attracting new employees and keeping current ones.
Bond prices continued to drop sharply. Yields on the 10-year U.S. Treasury bond jumped to 2.49 percent to close the week to a level not seen since May 2019. The year-to-date increase on the 10-year is 98 basis points. The 2-year U.S. Treasury bond closed the week at 2.30 percent, an increase of 157 basis points YTD. This is being watched closely as some are predicting an inverted yield curve, which could predict a recession.
After dropping the previous week, oil prices increased again about 10 percent for the week, closing Friday at $113 per barrel.
As we head into the April earnings season, the outlook is a little gloomy as many companies are lowering their expectations. Last week, more than twice as many companies lowered their earnings guidance than had raised them. According to FactSet, 66 companies cut expectations, while 29 raised them.
Reflecting higher interest rates, mortgage rates neared 5 percent, closing at 4.95 percent Friday for a 30-year fixed mortgage. The last time the 30-year mortgage topped 5 percent was in 2011. Friday’s close is 164 basis points (1.64 percent) higher than a year ago.
Rents are also increasing at a record rate, causing potential homebuyers to be unable to save enough money for a down payment. At the same time, lenders are becoming stricter about how much debt they will allow borrowers to take on in relation to their income. As we head into the spring homebuying season, the inventory of homes continues to be low. With mortgage rates and home prices continuing to rise, the median mortgage payment is now more than 20 percent higher than it was a year ago.
The National Association of Realtors is now predicting rates will stay near 4.5 percent, an increase of 50 basis points from their previous prediction. They also expect home sales to drop 3 percent this year. This expectation could decline further as some are predicting sales to fall by as much as 8 percent this year.