Market Week: March 21, 2022

The week in review

  • Retail sales edged up 0.3% m/m in Feb.
  • PPI for final demand rose 0.8% m/m in Feb.
  • Existing home sales fell 7.2% m/m in Feb .

The week ahead

  • Flash PMIs
  • Consumer sentiment
  • Durable goods

Thought of the week
Last week, the Federal Open Market Committee (FOMC) delivered on a very well communicated 25 bps hike, raising its federal funds target range to 0.25%-0.50%. As an overnight lending rate for banks, the federal funds rate influences consumer and business borrowing costs including rates on mortgages, credit cards, savings accounts, loans and corporate debt. When the Fed raises rates, they use it as a tool to tame hot consumer prices by making borrowing more expensive and saving more appealing.

As we head into the first rate hiking cycle since 2018, American investors should anticipate the following. First, investors should expect more tightening. The Fed made it clear that it plans to
hike rates more quickly and act nimbly in regards to incoming data. Accordingly, the median FOMC member is now signaling a hawkish path ahead with 6 additional hikes expected this year.
This would push up the Federal funds target range to 1.75- -2.00% by December 2022, a full percentage point higher relative to last December’s meeting. As illustrated in the chart, the market is bracing for a bit more hawkishness. Upon conclusion of the Fed meeting on March 16, markets pulled forward their expectations for the implied policy rate at year end to 1.99%, up from 1.83% just the day prior and from 0.82% at the start of the year. As we prepare for higher rates, investors should refocus their attention on valuations and opt for quality stocks with durable profits. In terms of fixed income, investors should anticipate that Treasury yields will be biased higher as the Fed continues to remove policy accommodation against a backdrop of higher inflation, making active flexible bonds a good choice. And lastly, investors should recognize that the path ahead is filled with uncertainty as markets recalibrate geopolitical risks, central bank moves and continued COVID-19 woes, making it critical for investors to have well-diversified portfolios to navigate the volatility ahead.

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