Zacks Investment Management

In this week’s Steady Investor, we take a look at some of the current events that are shifting the market, such as:

• Fed raising rates, again
• U.S. labor market showing signs of cooling
• U.S. manufacturing market status

The Fed Raises Rates Another 25 Basis Points, But Signals a Pause – At the Federal Open Market Committee (FOMC) meeting this week, the Fed announced its 10^th consecutive rate increase, bringing the benchmark fed funds rate to a range between 5% to 5.25%. All told, the Fed has now hiked the benchmark rate from the zero bound to 5% in just over one year, marking the fastest pace of rate increases since the Volcker Fed aggressively battled inflation in the early 1980s. The market was pricing in this 25-basis point increase, but expectations have also been set that this would be the final rate increase in 2023. Stress in the banking sector – which has been tied to the impact of rising rates on fixed-rate securities on bank balance sheets – only adds to the thesis that the Fed will pause to monitor how inflation and credit conditions in the economy evolve over the next several months. Previously, Fed Chairman Jerome Powell had been looking for clear signs of an economic slowdown and weakness in the labor markets to justify pausing the rate hike campaign. Today, the Fed has shifted to monitoring the economy for stronger-than-expected growth, hiring, and inflation as an impetus to continue raising rates. In the Fed’s policy statement, they dropped a key phrase from March’s meeting whereby they ‘anticipated’ that additional increases may be appropriate. May’s statement instead contained new language indicating the Fed would now shift to monitoring the economy to gauge the effects of previous rate increases. Chairman Powell noted: “That’s a meaningful change, that we’re no longer saying that we ‘anticipate’.” The next FOMC meeting is on June 13-14.¹

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• How to counteract the effects of rising inflation
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• Tax planning ideas to help avoid unpleasant surprises
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The U.S. Labor Market Shows Signs of Cooling Off – The US Labor Department reported that job openings fell in March while layoffs rose, signaling a loosening in the labor market that has largely eluded policymakers over the past year. It may feel a bit odd to cheer the weakening of the US labor market – after all, shouldn’t we want plentiful open jobs and few-to-no layoffs, i.e., a very tight labor market? In a period of very low inflation, the answer would be yes. But we’re not in a period of low inflation, which means that tightness in the labor market invites wage pressures that translate into price pressures. Consumers are armed with more money to spend, and corporations respond to higher wages by raising the prices of goods and services in order to pad or at least maintain profit margins. Inflation follows. That’s why March’s jobs report was welcomed by investors, with job openings falling to their lowest level in two years (see chart below) and layoffs rising to a seasonally adjusted 1.8 million, up from 1.6 million in February. The leading sectors with layoffs were leisure, hospitality, and healthcare, which were strong drivers of job growth in recent months.³

Source: Federal Reserve Bank of St. Louis⁴

U.S. Factory Activity Contracts, But Services Remain Firm – The Institute for Supply Management reported April data for the U.S. manufacturing and services sectors, which pointed to a mixed view of economic activity. The manufacturing index was 47.1% in April, which marked the 6^th consecutive month in contraction territory. April was an improvement over March’s activity but nevertheless, points to reduced demand for new orders and manufactured goods. From a macroeconomic perspective, however, manufacturing comprises a much smaller portion of the overall economy than services, which the ISM reported continues to hover in expansionary territory. Services PMI registered at 51.9% in April, marking expansion in 34 of the last 35 months. December 2022 was the single contraction reading, but the economy bounced back to start 2023. Key drivers of service activity have been robust activity in leisure and hospitality, with Americans continuing to travel and eat out. But the building boom has also kept activity firm in expansion, with a wave of apartment building, infrastructure projects, and many semiconductor manufacturing projects underway.⁵ 

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• The effects of inflation could diminish the real value of your nest egg
• Changes in your personal situation—such as a health emergency—could have an enormous

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Disclosure