The big news last week was that the Federal Reserve finally raised interest rates. Rates were hiked by 25 basis points, bringing official interest rates into the range of 0.25%-0.5%. This was expected and fully priced in by the market. Notably, this was the first rate increase in more than three years.
What did come as a surprise to some was that the Fed forecasted that they could hike interest rates another six times this year, which is slightly more aggressive than they have previously indicated. The Fed previously have guided for three to four rises, even though the bond market was pricing in more, in which the market is proving itself right. As a result, the 2-year Treasury yield jumped to 2% for the first time since May 2019. The 2-year Treasury yield best reflects Fed policy.
The Federal Open Market Committee further indicated three more rate rises next year, and none in 2024, which would bring interest rates to 2.5%-2.75%.
Fed Chair Jerome Powell maintained a resolve to tackle inflation, stating that “the committee is determined to take the measures necessary to restore price stability,” but did note that the US economy was strong and well-positioned to handle tighter monetary policy. A tighter monetary policy in itself indicates that the economy is strong enough to not rely on easy money policy.
Many companies have either needed to raise prices or accept margin erosion due to the higher cost of inputs, so we see this policy shift as a positive in the long term. In fact, we were concerned to an extent that the Fed would fall behind the curve, but this guidance strikes the right balance. Rates around 2.75% aren’t drastically high, it just may appear so as we have been accustomed to record low rates for the past few years. The market initially reacted negatively post-announcements, but climbed back to end the day higher, indicating the market didn’t mind this news once it sunk in.
Jerome Powell will be speaking this week, so we will be tuning in to seek further clarification on his monetary views for the year and beyond.
Australia’s central bank is taking a much more dovish stance, with there predicted to be only one rate rise this year. Price pressures are less pervasive in Australia, with underlying inflation at just 2.6%, which is within the RBA’s inflation target band of 2%-3%.
However, the need for extremely expansionary monetary policy could be called into question with the most recent print of some employment figures. Australia added 77,400 jobs last month, well above economists’ forecasts of just 37,000. This helped bring the unemployment rate down to 4%, beating expectations of 4.1%. The Australian government’s goal of having a ‘3’ in front of the unemployment rate looks like it will be happening very soon, perhaps before the federal election.
Further to this, core PPI inflation grew just 0.2% month-on-month, well below expectations of 0.6%. This is the inflation figure for prices related to producers and their manufactured goods. We do note that PPI including non-core items was higher, as it includes items such as oil which we all know too much about.
A few notable companies will be reporting earnings this week. Here is a quick overview for Wall Street expectations of results for some of these companies.
Nike: EPS of $0.71 and revenue of $10.63 billion
Adobe: EPS of $3.34 and revenue of $4.24 billion
Pinduoduo: EPS of $1.60 and revenue of $29.89 billion
We are particularly interested in see how Adobe does given some of the difficulties tech companies have experienced in the stock market in recent months. We fundamentally believe that earnings drives share price growth in the long term, so we will see if Adobe is able to perform well in their earnings report.
Pinduoduo is an agriculture-focused technology platform that has pioneered consumer-to-manufacturer e-commerce services in China. Chinese stocks have been suppressed as investors remained concerned about the regulatory risk and market interventionism from the Chinese government. However, Chinese stocks rallied last week as top economic officials in China made a concerted effort to announce they will introduce policies that benefit markets, as well as giving reassurance to investors. Stocks such as Pinduoduo and Alibaba jumped 56% and 43%, respectively.
Interesting Finance Fact of the Week
At the start of 2021, the United States represented 56% of global market capitalisation.
This has risen from US listed companies representing just 40% of the global market in 2018.
Have a great week,
Sam Waldron - Research Analyst