The sharp price declines that marked the previous trading week mainly reflected the high level of uncertainty that currently exists: the data still indicate high inflation, and on the other hand growth is beginning to show signs of slowdown, there are still supply chain disruptions and China spread. Disruptions in the supply chain. Putin is gearing up for a campaign in Ukraine, which is contributing to geopolitical tensions, which are also affecting world trade and pushing up energy prices. To this must be added the fear in the market that wrong steps by the Federal Reserve in its fight against inflation will push the American economy into recession. This environment creates pressure on growth stocks and more risky assets.
Despite rising interest rates, banks’ profits are shrinking
During the earnings reporting season, so far about 50% of the companies included in the S&P 500 have published their reports, and about 80% of them have been pleasantly surprised by earnings per share (EPS). About 70% showed higher revenues than earlier forecasts. The three sectors that have disappointed so far are financial, consumer goods and communications services, which showed negative growth in earnings per share. At the historical level, higher interest rates actually benefit with the financial sector, since banks give loans at long-term interest rates and pay yields at short-term interest rates. However, as the economy slows down consumers exercise greater caution and take out fewer loans – and as a result banks’ revenues decline. The rise in mortgage prices may also cool the demand in the housing market. As for consumer goods, high inflation is biting into the profit margins of companies, especially in smaller companies that will have a hard time rolling the price-up to the consumer. In the technology sector the big names displayed impressive revenue but technology stocks plunged amid the shortage of components. Technology stocks have so far shown an 11% increase in both earnings and earnings per share.
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Fed Chairman Jerome Powell will be content with a 0.5% increase in interest rates this week
(Photo: AP)
The Federal Reserve will have to cool the employment market
The coming week will be fateful. The Federal Reserve’s interest rate meeting will be held on May 3-4. We estimate that the bank will raise the interest rate by 0.50% and not by 0.75%. The hints of a 0.75% interest rate hike were apparently intended
To moderate the market’s response to an increase of about half a percent. The employment report for April will be published on Friday. The labor market continues to be tight. The labor market usually functions best when the vacancy rate is equal to the unemployment rate. Currently the unemployment rate stands at 3.6% and the vacancy rate at 7%. That is, there are more vacancies than demand for jobs. As this trend continues, this will lead to an increase in wage levels – and the Federal Reserve will have no choice but to tighten policy to cool the labor market.