The Fed rate dance and the spring economic thaw

Two movies we have seen before.

Robert Johnson, CFA 23 May, 2016 | 5:00PM

World equity markets were basically unchanged on the week, as stocks were stuck in a tug-of-war between better economic news and fears that the U.S. Federal Reserve would push interest rates higher, perhaps as early as June.

Several notably better earnings reports ( Wal-Mart WMT and Home Depot HD) helped to limit the impact of new Fed worries. Equity markets varied from down 0.3% (emerging markets) to a positive 0.9% (Europe), with the U.S. in the middle of the range.

Most of the weakness this week occurred around the time of the release of the Federal Reserve minutes on Wednesday. Those minutes revealed the Fed was worried that world markets were not taking the possibility of Fed rate hikes seriously enough. Some of the more hawkish Fed governors (those worried about inflation and pushing for higher rates) got more air time earlier in the week, also spooking bond investors. The yield on the 10-year bond jumped from 1.72% last week to 1.85% this week, one of largest one-week jumps of the year. Still, that 1.85% rate is lower than before the Fed's March meeting and the 1.92% rate at year-end. Broad U.S. bond indexes lost just 0.5% for the week, with high-yield bonds faring better with small gains. Bond prices remain close to 2016 highs, despite greater caution this week.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.

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