Rates rise following Federal Reserve rate hike and positive jobs growth

Markets react to continued hawkish Federal Reserve sentiment

The Federal Reserve met market expectations last Wednesday and raised rates by 75 basis points for the fourth straight time to a target range of 3.75%-4.00%. This represents the highest level rates have seen in 15 years.

Markets initially interpreted the changes to the Federal Reserve’s statement as a dovish turn. The Federal Reserve indicated anticipation of future rate increases but added that they will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” when determining the pace of any potential future increases. Rates dropped sharply immediately following the release of this statement.

However, in Federal Reserve Chair Powell’s news conference following the release of the statement, Powell reiterated the Fed’s commitment to hiking rates saying that the Fed “still ha[s] some ways to go and incoming data from our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Rates jumped following Powell’s news conference, with the 2-year treasury rate reaching levels not seen since 2007. The 2-year treasury closed the week up over 20 basis points at 4.6% after hitting a high of 4.883% during the day on Friday. Given the current rate environment, many corporations continue to look at taking part of their floating rate risk off the table by swapping to fixed rates.

(Related insight: Read, "Interest rate caps vs. swaps: corporates weight the alternatives")

Positive top-line job growth amid mixed underlying data and news of layoffs

The U.S. added 261,000 jobs during the month of October with all major industries showing growth during the month. However, the unemployment rate rose to 3.7% and hourly wage growth seemed to slow with hourly wages up only 4.7% over the past year. Last Tuesday, JOLTS data showed 10.7 million job openings, well above analysts’ expectations. There are now 1.75 job openings for every unemployed individual currently seeking employment. Markets interpreted all of this as mixed data with the top line number coming in well above expectations, but other data showing potential signs of slowing growth.

Several large corporations also announced rounds of layoffs or hiring freezes this week to accompany this mixed data. Stripe and Lyft both announced layoffs last Thursday, cutting 14% and 13% of their respective workforces. Amazon announced a hiring freeze for corporate positions, while Apple announced a hiring freeze across all departments except for research and development.

U.S. dollar weakens amid potential signs of a slowing economy

The U.S. dollar index fell nearly 2% on Friday as the U.S. showed more new jobs than markets expected, but some of the peripheral data implied signs of a slowing economy. A higher unemployment rate of 3.7% and slowing wage inflation caused investors to pull back on their dollar investments. Additionally, rumors swirled Friday of a potential reopening of the Chinese economy after months of strict COVID lockdowns. Chinese markets and the Chinese Yuan rose sharply on Friday following these rumors, with CNY ending the day up nearly 1.5% against the dollar.

Looking Ahead

This week brings midterm elections on Tuesday followed by CPI inflation data on Thursday. Additionally, several Fed members are slated to speak this week following last week's rate hike.

(Related insight: Download our new quantitative benchmark report, "The state of financial risk management.")