2 reasons why the Fed may keep raising rates

The equities markets posted solid gains last week, as the Dow was also able to post a modest breakout. The bulk of the gains took place on Tuesday with the catalyst for the strength being the release of March's Fed Minutes report, which suggested that the Fed was nearing the end of their tightening cycle. This news sent stocks firmly higher and shorts scrambled to cover their bearish bets. Despite Tuesday's announcement, Tech shares struggled for the remainder of the week due to a number of lackluster earnings reports. Bellwethers Intel, Apple, Juniper, Novellus and SanDisk all had disappointing reports, which caused the NASDAQ to significantly under perform. Meanwhile, Energy shares continued their winning ways, as crude oil finished the week above $75 per barrel.

There was a lot of market-moving news for market players to digest over the last 5 trading sessions. Not only did we have a full schedule of earnings reports, but there were several critical economic reports, as well as several important comments made by Fed officials. Also, commodity prices continued their rally, with gold, oil, copper and silver all recording multi-decade highs (copper and oil are at all-time highs). Clearly, there were many crosscurrents to navigate when trading in recent days.

When stepping back and looking at the big picture, I still can’t help but remain concerned over the possibility of the Fed continuing beyond what most market players expects. We have seen endless "one and done" rallies over the last year (i.e. one more rate hike and the Fed is done), but obviously the Fed has continued on with 15 straight rate hikes. There are two main reasons why the Fed may continue to raise rates. First, many economists expect Q1 GDP to be around 5%, while corporate profit growth has remained strong. Second, commodity prices have continued higher in the face of these hikes, which has to cause one to question whether inflation is contained. One would have to assume that the Fed could be becoming nervous over the lack of impact that recent rate increases is having with regard to commodity prices and economic expansion. This, in turn, may cause them to keep tightening beyond what is necessary in order to show they are in control of inflation. Unless something changes, it would not be surprising to see a further correction in the market near-term.

Daily Pivots for 4-24-06

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran
chris@tradewindsonline.net

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.