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FED COMMENTS PUSH U.S. STOCKS LOWER

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FED COMMENTS PUSH U.S. STOCKS LOWER

May 25 2015, 06.55am GMT

STOCK.com

Given the volatile trading session on Friday last week, U.S. stocks ended modestly lower, while the Nasdaq Composite Index and the S&P 500 achieved modest weekly gains.

Stocks sold off on Friday towards the end of the session. This came after the Federal Reserve’s chairwoman, Janet Yellen said in a speech delivered in Providence, Rhode Island, that she still expects that the central bank will raise interest rates sometime during this year.

The Dow Jones Industrial Average (DJIA) ended 53.72 points, or 0.3% lower at 18,232.02 ending the week with a loss of 0.2%. Meanwhile, the S&P 500 (SPX) ended 4.76 points, or 0.2%, down at 2,126.06; however, over the week, the benchmark index gained 0.2%. Also, the Nasdaq Composite (COMP) closed the session 1.43 points down at 5,089.36, but recorded a 0.8% increase over the week.

In early trade on Friday, stocks were already weaker after a measure of price inflation saw a stronger than expected reading. With an increased CPI (consumer price index), coupled with improved labor markets, this gives the Fed more ammunition to hike interest rates sooner. This comes despite the minutes from the latest Federal Open Market Committee (FOMC) meeting seemingly suggested that a rate hike in June this year was not likely.

The comments from Yellen on Friday gave support to views that the Fed is preparing to increase rates at some time this year, possibly as early as June, although economic reports sometimes have suggested that the U.S. economy was not on a solid footing economically after the Great Recession.

In her speech on Friday, Yellen again gave similar remarks when referring to the string of weaker economic data as being “transitory”. She also added that signs from the economy were looking strong enough for the Federal Reserve to raise interest rates sometime in the year, followed by slower moves thereafter.

Tower Bridge Advisors president, Maris Ogg, stated that the market is currently digesting a possible hike in interest rates this year reasonably well. She added that investors know that an increased rate indicates that the economy is improving. A 25 or 50 basis points rise won’t affect the economy or companies much and from a zero starting point, this means that it will take some time before a negative effect is felt by the markets due to the rate hike. Ogg also added that the second half of this year will indicate if housing and capital expenditures have really picked up and if that will be an earnings driver in 2016.

Meanwhile, Chris Weston, an IG chief market strategist, said in a note that as long as the bond yields move lower or sideways then equity investors are happy to put money to work. Also, the CBOE Volatility Index (VIX) is currently testing this year’s lows of around 12.11%, which is now 33% under the 5 year average, said Weston.

According to the Labor Department, in April, the U.S. consumer prices increased a seasonally adjusted 0.1%. Last month the energy prices weakened by 1.3% while the prices of food remained unchanged. Excluding volatile food & energy costs, the core CPI jumped 0.3%, attributed to increased costs in medical care and another rise in housing expenses.

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