This week, RFA’s Director – Financial Planning, Gabe Adams, CFP®️, MSPFP, reports on Fed Chair Jay Powell’s most recent speech, covers the sudden jump in mortgage rates, and shares impressive earnings from current RFA portfolio holding Nike.


Hi, and welcome to the Weekly Market Update.  As we near the end of the first quarter of 2022, investors have plenty to worry about including the war in Europe, inflation levels not seen in decades, and the possibility of slowing economic growth on the horizon. So, let’s start by taking a look at recent hawkish comments by Fed Chair Jay Powell before turning to an update on the housing market. We even had stellar results from Nike which beat expectations on both the top and bottom lines.

Financial markets reacted so well to last week’s Fed meeting and press conference where an aggressive series of short-term interest rate hikes were unveiled that Fed Chair Jay Powell decided to double down on the hawkish tone during a speech to economists on Monday.  He said the FOMC, the group that actually sets the Federal Funds Rate, was open to the idea of bumping rates by 50 basis point, if need be.  This is even more aggressive than the currently projected 25 basis points at every meeting.  The reaction was instantaneous, with the yield on the two year Treasury bond jumping 20 basis points to a level not seen since before the pandemic, as we can see in this first chart. The yield on the two year bond is seen as the most sensitive to the Fed’s monetary policy intentions. Supposedly, it shows where the Fed Funds Rate will be two years from now. We can see the history of the Fed Funds Rate in this next chart, where the short-term interest rates top out just about where they were before the pandemic, as well as current projection of future rates. It is interesting to note the pattern of lower highs before each recession. There is some debate whether the Fed will actually succeed in implementing all of their planned rate hikes due to fears of economic slowing on the horizon even though the economy is currently too strong. Certainly, the bond market is not overly concerned with rampant inflation. As we see in this next chart, the big moves in interest rates have been in shorter term securities, which are reflective of Fed policy, while long term bond yields, which are sensitive to inflation expectations, have hardly moved. This flattening of the yield curve is often associated with a looming economic slowdown.

With the Fed raising interest rates off their two year bottom last week, we’re already seeing residual effects in various places in the economy. For instance, while the overall housing market remains hot, we are seeing a sudden jump in mortgage rates, and this is having a negative impact on mortgage applications. These have dropped 12% from a year ago, while refinancing demand is down 14%. This also may account for the heavy activity in the home buying market over the past few months. Everyone knew higher interest rates were coming, and people got in while the getting was good. Now, the 30 year fixed mortgage rate on a home worth under $650,000 has notched up 23 basis points to 4.5%. This is historically still a good mortgage rate, but remember we are on pace for at least half a dozen more interest rate increases this year, with a handful more expected in 2023. And Fed chair Powell suggested on Monday a 50 basis point increase at the Fed’s May meeting was worth considering. So, we’re cranking up rates, which will have a pronounced effect on the mortgage market. This is not to say the Fed shouldn’t be raising rates. It’s the single most efficient tool with which to fight inflation. And it will likely have a clear effect on cooling housing prices. And this, in turn will show up in inflation data over time, to the downside, which is good.

After the close on Monday, Nike, a holding in both Core and Defensive portfolios, said that it earned 87 cents a share as revenue climbed 4.8% from a year ago to $10.9 billion. Consensus called for Nike to earn 72 cents a share in the quarter, 15 cents above estimates, on sales of $10.6 billion. Like so many companies, Nike said it saw increased transport costs, but its gross margins expanded 100 basis points in the quarter, aided in part by fewer discounts and foreign exchange rates. Direct to consumer sales tracked by the Nike Direct division climbed 17% in the quarter, while Nike digital sales jumped 22%, led by a 33% increase in North America.  Nike shares have slipped 22% this year, as investors fret about issues from a slower rebound in China to supply chain constraints. The company noted some weakness in China, but it saw stronger results elsewhere in the Asia Pacific region, and also saw traffic normalizing at its retail stores, as shoppers returned to company owned physical locations. Nike said that demand remains robust across its portfolio of brands, so much so that growth in the third quarter would have been even stronger if not for inventory constraints. The company said that inventory supply is starting to improve, but that it still seeing long transit times. Nike’s bottom line results have consistently come in ahead of expectations in recent years.  The company got a huge boost from the pandemic, as demand soared, but its outlook has been more key to the stock performance of late as the market questions how pandemic winners can maintain momentum.

So, what does it all mean?  Investors are still wrestling with whether The Fed is moving too slowly or too aggressively in raising interest rates. The ongoing pandemic and the war in Ukraine don’t make it any easier to settle this debate. Fortunately, The Fed is data driven and they’ll adjust course over the next couple of years as needed. The economy will slow and inflation will cool off, either on their own or with help from the Fed. In the meantime, your great companies such as Nike continue to navigate a challenging world and post stellar results. The first quarter ends next week, so soon we will be in the thick of another earnings reporting season. We will bring you all of the details. So please, sit back, relax, have a great weekend, and join us next time for the Weekly Market Update.

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