Soft Landing? Don't Bet On It Just Yet: Fed's Barkin Indicates Further Rate Hikes Possible
Portfolio Pulse from Piero Cingari
Richmond Federal Reserve President Tom Barkin indicated the possibility of a 'soft landing' for the U.S. economy but did not rule out further rate hikes. He emphasized the need for a data-driven approach to future Fed decisions, particularly in response to inflation trends. Following his remarks, the U.S. dollar index rose, Treasury yields increased, and stock ETFs such as SPY, QQQ, and IWM saw declines.
January 03, 2024 | 3:49 pm
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NEGATIVE IMPACT
The iShares Russell 2000 ETF (IWM) tumbled 1.3%, underperforming larger cap indexes, as small caps are often more vulnerable to economic shifts and higher interest rates.
Small cap stocks, like those in IWM, may be more affected by rate hikes due to their typically higher cost of capital and lower profit margins, making them more sensitive to economic changes.
CONFIDENCE 85
IMPORTANCE 80
RELEVANCE 90
NEGATIVE IMPACT
The Invesco QQQ Trust (QQQ) also saw a 0.5% drop, reflecting investor caution in the tech-heavy index due to the potential impact of higher interest rates.
Tech stocks, which are well-represented in QQQ, are particularly sensitive to rate hikes as they often rely on borrowing for growth and are valued on future earnings, which could be discounted more heavily.
CONFIDENCE 85
IMPORTANCE 80
RELEVANCE 90
NEGATIVE IMPACT
The SPDR S&P 500 ETF Trust (SPY) fell 0.5% amid concerns over further rate hikes, which could dampen economic growth and corporate earnings.
Stock ETFs like SPY often decline on news of potential rate hikes, as higher borrowing costs can slow economic growth and reduce corporate profits.
CONFIDENCE 85
IMPORTANCE 80
RELEVANCE 90
NEGATIVE IMPACT
The US Treasury 10-Year Note ETF (UTEN) decreased by 0.4% as Treasury yields rose, which is a common reaction to the anticipation of rate hikes.
The price of bond ETFs like UTEN typically falls when yields rise, as existing bonds with lower yields become less attractive compared to new bonds issued at higher rates.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80
POSITIVE IMPACT
The Invesco DB USD Index Bullish Fund ETF (UUP) rose 0.4% following Barkin's remarks, indicating investor anticipation of continued rate hikes and a stronger dollar.
Barkin's comments on potential rate hikes typically strengthen the dollar as higher rates can attract foreign investors seeking higher returns, which in turn can boost UUP.
CONFIDENCE 85
IMPORTANCE 70
RELEVANCE 80