(Boursier.com) — The US stock market ended the week at half mast on Friday, in reaction to the offensive remarks made the day before by the President of the Fed on the subject of future rate hikes. Jerome Powell indicated that a half-point tightening would be “on the table” for the May meeting, and hinted that further hikes of the same magnitude could soon follow to rein in inflation. No sector was spared the decline on Friday, as bond yields continued to tighten, at more than 2.9% for the US 10-year T-Bond. Oil is falling amid fears over demand from China, where anti-Covid lockdowns are weighing on activity.
Two hours before the closing, the Dow Jones lost 2.02% to 34,089 points, while the broad index S&P500 loose 2.09% at 4,301 pts and that the Nasdaq Composite, rich in technology and biotech stocks, dropped 2.04% to 12,904 pts. Reflecting the nervousness of investors, the VIX volatility index (nicknamed “the fear index”) jumped more than 20% to rise to 27.24 points.
Operators were also disappointed on Friday by the quarterly accounts of several large companies, including Verizon (-6%), HCA Healthcare (-20%), Newmont (4%) or Snap Inc. (-2.1%), while gap issued a devastating “profit warning” which caused the stock to plunge by 19%.
Key rates around 3% at the end of the year for the Fed?
Bond tensions continue in the aftermath of statements by Jerome Powell signaling an acceleration in the pace of monetary tightening by the Fed. In the United States, the futures markets anticipated Friday evening a rise of half a point in the rate of the “fed funds” in May, then a major tightening of three quarters of a point in June, followed by a new increase. half a point in July, which would bring the rate to 2.00%-2.25% by the end of July, according to CME Group’s FedWatch tool. For the end of the year, the probability that this rate is around 3% has exceeded 50%.
Friday evening, the yield of the US government bond (T-Bond) at 10 years peak at 2.90% and the yield of theT-Bond at 2 yearswhich reacts more to monetary policy, is at 2.71% (+5 bp), both the highest since November 2018. In Europe, the yield of the 10-year German bund, the benchmark for the eurozone, climbed 2 bps to 0.97%. These rates have soared since the beginning of the year, which started at 1.5% respectively for the US “10-year”, 0.72% for the “2-year” and -0.18% for the German “10 years”.
Jerome Powell paves the way for a half-point rate hike on May 4
On Thursday night, the Fed chairman, speaking at an IMF-hosted debate in Washington, spoke particularly strongly, saying he felt it was “appropriate to move a little faster than expected.” to raise key rates, and hammering that it was “absolutely essential” to control inflation. He admitted for the first time in public that it was possible that the Fed would raise its key rates by half a point at its next meeting. The subject of a 50 basis point hike “will be on the table” at the May 3-4 meeting, he said. He also said he was in favor of the idea of rapidly raising rates (“front-loading”) during the cycle of exit from accommodative monetary policy.
Mr Powell added that the Fed was not betting that inflation would have peaked in March, and that it would “move quickly” to bring policy rates back to neutral or even restrictive territory if it happens. is appropriate. The Fed chief also acknowledged that the central bank’s objective of steering a soft landing for the economy will be “neither simple nor easy”.
At its March meeting, the US central bank had raised the rate of “fed funds” by a quarter point, its first increase in three years, to bring it between 0.25% and 0.50%. Fed officials estimate the neutral level for the economy to be around 2.4%. But several members of the Fed think it will take more to tackle inflation, which reached 8.5% over one year in March in the United States. James Bullard, Fed boss of St-Louiss, even believes that the “fed funds” rate should be raised to 3.5% by the end of the year, and raised by three-quarters of a point in May…
The latest economic activity indicators published in the United States showed a slight slowdown in April. The preliminary composite PMI index thus stood at 55.1, against a market consensus of 57.5. The manufacturing index came in at 59.7, better than expected, but the services indicator fell to 54.7, well below the consensus of 58.
Dollar strengthens, benefiting from rising yields
On the currency side, the dollar index rose sharply in the evening, gaining 0.65% to stand at 101.23 points against a basket of reference currencies, levels not seen since the start of 2003! The greenback is benefiting from the rise in bond yields in the United States, which makes investments in dollars more profitable than other investments, such as gold, but also stocks, in the current context of risk aversion. gold fell 0.7% to $1,934.30 an ounce on Friday, for the June Comex futures contract.
euro yielded Friday evening 0.41%, falling to $1.0792, the lowest since March 2017 against the greenback, the ECB not being as eager as the Fed to raise its key rates. As to yenit fell to its lowest level since the beginning of 2002 against the dollar at 128.50 Y/$, a loss of interest which comes as the Bank of Japan signaled that it would pursue a very accommodative monetary policy, unlike the Fed.
Oil prices fell again on Friday evening, amid fears of lower Chinese demand, which outweighed speculation of an EU embargo on Russian oil. The barrel of American light crude WTI (June futures contract) fell 1.9% to $101.83 on the Nymex, while the Brent North Sea is down 1.46% to $106.75 for the June contract.
Russia aims for full control of southern Ukraine and Donbass
On the geopolitical front, Russia, which since Thursday has claimed victory in the port city of Mariupol, announced on Friday aim for full control of southern Ukraine and the Donbass region nearly two months after the start of the Russian offensive against the country. The United States believes that the next four weeks will be decisive for the future of Ukraine, and has just announced $800 million in additional military aid to the country.
This new tranche brings aid to Ukraine to more than $4 billion since the start of Joe Biden’s mandate, including $3.4 billion since the start of Russia’s invasion of the country on February 24, the Pentagon said. The United States also intends to provide additional economic aid of $500 million to the Ukrainian government, so that it can pay the salaries and pensions of civil servants and continue to provide public services.
VALUES TO FOLLOW
Snap Inc. (-2.1%), parent company of Snapchat, was somewhat disappointing in the first fiscal quarter, posting a widening of its loss. Nevertheless, user growth exceeded market expectations. The number of daily active users climbed 18% to 332 million, but the group suffered a net loss in “a difficult operating environment”. User forecasts are positive, but the group also warns that…supply chain disruptions, labor issues and inflation could affect ad spend.
The Californian group from Santa Monica posted revenues of 1.06 billion dollars in the quarter ended at the end of March, up 38% year-on-year, against 1.07 billion consensus. Quarterly net loss was $360 million, down from $287 million a year earlier. Adjusted EBITDA was positive at $64 million, compared to a $2 million deficit a year earlier. Free cash flow was $106 million, compared to $126 million for the comparable period last year.
gap fell by 19% on Wall Street, while the American clothing retailer has just warned about its sales and also announced the departure of the leader of the Old Navy chain, Nancy Green. Gap said it now sees first-quarter sales decline 11-15% from an anticipated 5%-9% decline in March. The group made no reference to its full-year outlook, which includes adjusted earnings in the range of $1.85 to $2.05 per share.
American Express (-1.8%) published for its first fiscal quarter revenues up 29% to 11.7 billion dollars, for a net profit of 2.1 billion dollars and $2.73 per share compared to $2.2 billion from last year. Member spending supported activity, with the resumption of travel and entertainment activities. The consensus was at $2.44 quarterly earnings per share. Spending on travel and entertainment soared 121% on an adjusted basis from a year earlier, and returned in March, for the first time, to pre-pandemic levels. AmEx maintains its full-year revenue growth forecast of 18% to 20%, while earnings per share are expected between $9.25 and $9.65.
Newmont (-4%), the Denver mining giant, announced for its first quarter a net profit attributable to shareholders down to 432 million dollars or 54 cents per share, against 538 million dollars over the comparable period of the year latest. Gold production represented 1.34 million ounces, down 8%, affected by the health crisis and Omicron. Adjusted EBITDA was $1.4 billion.
Verizon (-6%), the American telecom operator, announced for its first fiscal quarter revenues of 33.6 billion dollars, up 2.1% year-on-year, for a net profit of 4.7 billion dollars down 12% and an adjusted EBITDA of 12 billion down 1.1%. Adjusted earnings per share were $1.35 for the quarter ended compared to $1.36 in the first quarter of 2021. Market consensus was $1.34 in adjusted earnings per share for $33.53 billion in revenue .
Schlumberger (+4%), the oil services giant, published a quarterly profit above market expectations and reported a 40% increase in its dividend. Quarterly net income was $510 million and 36 cents per share, compared to $299 million in the comparable period last year. Excluding one-time items, adjusted earnings per share were 34 cents, versus a FactSet consensus of 33 cents. Revenue improved 14% year-over-year to $5.96 billion, also beating consensus.
HCA Healthcare (-20%), the Nashville hospital giant, stalls on Wall Street. For the first fiscal quarter, the group reported revenues of $14.94 billion, as well as a group share of net profit of $1.27 billion, or $4.14 per share. Adjusted EBITDA was $2.94 billion. Cash flow from operating activities amounted to 1.34 billion. A year earlier, revenue was less than 14 billion and profit was 1.42 billion. The consensus was $4.25 in adjusted earnings per share on $14.74 billion in revenue.
Kimberly Clark (+9%), the American consumer products giant, beat the profit consensus for the quarter ended and revised its forecasts upwards. For the first fiscal quarter, Kimberly posted net income of $523 million or $1.55 per share, compared to $584 million a year earlier. Adjusted earnings per share were $1.35, versus a FactSet consensus of $1.24. Revenues stood at 5.09 billion dollars, against 4.74 billion a year before and 4.92 billion consensus. The guidance for annual sales has been revised upwards, with organic growth now expected between 4 and 6%. Adjusted EPS is expected between $5.6 and $6.