FED CHANGES TUNE ON INTEREST RATES

Stocks closed out a bumpy week mixed, ending a three-week stretch of losses for the S&P 500 and NASDAQ. The Dow, however, extended losses for a fourth straight week for the first time since 2014.^[1] For the week, the S&P 500 gained 0.28%, the Dow lost 0.20%, the NASDAQ gained 1.10%, and the MSCI EAFE added 0.16%.^[2]

Market reactions to the release of the April Federal Reserve Open Market Committee meeting minutes drove much of last week’s volatility. The official minutes showed that the Fed is moving away from its cautious stance and is open to raising interest rates as soon as June if data points to a solid second quarter.^[3] The unexpected hawkishness surprised many investors who weren’t expecting a hike until later this year.

However, some professional economists predicted a June hike. The most recent Wall Street Journal survey of economists showed that their experts were split, with 31.4% predicting a June increase, 21.4% favoring a July hike, and 31.4% forecasting a September increase.^[4] On the other hand, Wall Street largely discounted a June move. Early in the week, before the minutes were released, traders predicted just a 4% chance of a June rate hike. By Friday, that probability had increased to 30%.^[5] Clearly, the new information is forcing investors to revise their expectations for interest rate movements this year.

The labor market will play a major role in the Fed’s June decision. The April jobs report was softer than expected, showing that many employers were reluctant to hire in the face of uncertain business conditions.^[6] The May jobs report, due on June 3rd, will be key to showing whether the labor market has returned to a strong trend or is continuing to weaken.

Will a strong May jobs report guarantee a June rate hike? Some experts think so while others think the risks posed by Britain’s upcoming vote on whether to leave the EU (the “Brexit” you may have read about) will be enough to give the Fed pause.^[7] All told, it’s likely to be a lively June meeting at the Fed.

Volatility is likely to continue in the days and weeks ahead as analysts fixate on predicting when the central bank will raise rates again. While short-term volatility can be stressful to investors who would prefer a steady ride, it’s important not to let intraday swings and bumps in the road derail your long-term investment strategies. We’ll keep you updated.

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index Flash
Tuesday: New Home Sales
Wednesday: International Trade in Goods, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims, Pending Home Sales Index
Friday: GDP, Consumer Sentiment, Janet Yellen Speaks 10:30 AM ET

_{Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices, and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.}

HEADLINES:

April housing starts surge. Groundbreaking on single- and multi-family homes jumped 6.6% last month as construction firms grew more optimistic about business prospects.^[8]

Industrial production rises. Stronger demand for utilities drove industrial production 0.7% higher in April. However, the manufacturing component rose just 0.3% after declining in March, indicating that U.S. manufacturers are still struggling.^[9]

Jobless claims fall from 14-month high. Weekly claims for new unemployment benefits fell last week, showing that the previous weeks of increases might have been an anomaly.^[10]

Existing home sales increase more than expected. Sales of existing homes rose 1.7% in April and March’s resales were revised slightly higher, suggesting that the housing market is gaining ground.^[11]

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