Surviving the Fed Is as Easy as One, Two, Three

For starters, don’t get your hopes up. The Fed Funds rate is going up, probably by another 0.75%, putting short-term U.S. lending rates at 3.25%, levels not seen since 2008. Hopes for a lesser increase went by the wayside after that inflation report.

Next, don’t focus on the headline rate increase. Rising short-term rates don’t mean all is lost for the economy or for stocks. Longer-term rates matter more. Instead of the Fed Funds rate, focus on moves in inflation expectations and longer-term bond yields, such as U.S. 5- and 10-year Treasuries. That can give investors a sense for what real interest rates will do. Real rates are, essentially, the interest rate paid less inflation.

Higher real interest rates are really what slows the economy and depresses stock valuations. Right now, inflation expectations are about 2.4% a year and the U.S. 10-year Treasury yield is at roughly 3.5%. That yields a real rate proxy of about 1%, up roughly 2 percentage points so far in 2022. If that calculus doesn’t change in the days or weeks following the Fed, it’s a sign investors have some confidence the Fed has control of the situation.

Third, don’t get greedy. The Fed might not get things exactly right. The central bank is raising rates while

FedEx

(FDX), for instance, is warning of a global slowdown. Reasons for caution abound. John Roque at 22V Research pointed out that the S&P 500 has been below its 200-day moving average for 112 consecutive days. A trend like that typically means the market is headed for lower lows and lower highs as it bounces around.

Staying conservative with a little cash on the sidelines is probably prudent.

—Al Root

*** Join Barron’s senior managing editor Lauren R. Rublin, deputy editor Ben Levisohn and Chris Davis, chairman and portfolio manager of Davis Advisors, today at noon when they discuss the outlook for financial markets, industry sectors, and individual stocks. Sign up here.

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Fed’s Next Rate Hike Will Be Harder Than Earlier Increases

Jerome Powell’s next steps on the Federal Reserve’s money tightening policy will be harder, as the economy is starting to show the impact of the central bank’s rate increases to curb consumer demand and rein in inflation. The Fed will announce its monetary-policy decision on Wednesday.

• Manufacturing is slowing and retail sales are softening amid high inflation rates, while the labor market remains nearly as tight as ever. New jobless claims fell for the fifth straight week, and the insured unemployment rate has fallen below 1%.

• Powell has for weeks emphasized that the Fed knows its actions will spark a painful fallout. But he also says that not reining in inflation now will only cause more pain in the future, and the Fed won’t be deterred from its goal of bringing inflation back down to 2%.

• The ICE U.S. Dollar Index, which measures the dollar against a basket of other currencies, is up 14% in 2022, on track for its best year since the index began in 1985. The euro, Japanese yen and British pound as well as emerging market currencies such as Hungary’s forint are getting battered.

• The European Union recommended suspending 7.5 billion euros in funding for Hungary, or about 5% of its 2022 gross domestic product, over corruption, the first such instance by the bloc under a new sanction. EU members have three months to decide, Reuters reported.

What’s Next: There is nothing requiring Fed officials to pay attention to the economic impact of their tightening, said Tim Quinlan, a senior economist with

Wells Fargo
.
But following through on it as joblessness jumps, small businesses close, and the economy contracts will be a real test of the Fed’s resolve.

—Megan Cassella and Janet H. Cho

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Biden Declares Disaster for Puerto Rico as Hurricane Fiona Hits

Hurricane Fiona struck Puerto Rico on Sunday, and forecasters warned to expect “historic” levels of rain along with landslides. The storm, packing maximum sustained winds of 85 mph at landfall, left the island in a power blackout.

• President Joe Biden declared a federal disaster emergency, ordering assistance to the island. Fiona hit Puerto Rico just days before the fifth anniversary of Hurricane Maria’s strike, which left 3,000 people dead and wiped out the power grid.

• Fiona is the Atlantic hurricane season’s sixth named storm. It is expected to track away from the mainland U.S., according to the National Weather Service, and far away from the Gulf Coast, where facilities handle nearly half of U.S. oil refining and more than half of natural gas processing.

• Gasoline prices have fallen 6% from one month ago, to an average of $3.678 a gallon nationally for regular, AAA said. A group of Democratic lawmakers on Friday asked Biden to continue to release oil from the Strategic Petroleum Reserves, an action aimed at lowering oil and gasoline prices, CNN reported.

• Biden’s job approval rating has risen to 45%, its highest point since October, weeks ahead of the midterm elections. The share of registered voters who approve of Biden’s job performance is up 3 percentage points from August, according to an NBC News poll.

What’s Next: The National Weather Service said it has been the slowest start in 30 years for the Atlantic hurricane season, which runs from June through November. Forecasters predict as many as 21 storms, 10 of them reaching hurricane status, with maximum sustained winds of 74 mph.

—Liz Moyer

***

Goods Retailers Feel Effects of Home Sales Slowdown

The slowdown in home buying is weighing on sales at the furniture, electronics, and appliance stores that depend on housing demand. Sales at furniture and home furnishing retailers fell 1.6% in August over last year, while electronics and appliance retailer sales dropped 5.7%, the Commerce Department said.

• At the same time, prices for household furnishings such as furniture, bedding, curtains and carpets rose 1.1% in August from July and were 10.6% higher than last year, the Labor Department said. Appliance prices fell in August from July by the most in nearly two years.

• Jared Simon, owner of Massachusetts-based Simon Furniture, Mattresses & Appliances, told The Wall Street Journal their inventory is up 55% from before the pandemic. Appliance makers are offering discounts for shoppers who buy a whole package, such as for a kitchen renovation, something Simon said he hasn’t seen since 2019.

• The National Association of Realtors estimates that the real estate industry and related consumer spending makes up 17% of economic output, including spending on home remodeling, lawn care, furniture, moving, and new-home construction.

• 
  
  RH
  ,
  formerly Restoration Hardware, expects net revenue to fall from 15% to 18% in the quarter ending Oct. 29, in part because of comparisons to 2021’s records. Shares of RH are down 51% this year, and shares of

  
  
  Wayfair
  
  and

  
  
  Williams-Sonoma
  
  are down 76% and 20%, respectively.

What’s Next: The National Association of Home Builders releases its September housing index this morning. It has fallen every month this year and in August breached the break-even measure of 50 for the first time since May 2020.

—Janet H. Cho

***

GE HealthCare Prepares for January 2023 Spinoff

GE HealthCare, set to spin off from

General Electric

in January 2023, aims to offer healthcare providers with new solutions to improve healthcare outcomes, via four areas: Imaging, which includes MR, CT, and PET scanners; ultrasound imaging, patient care services; and pharmaceutical diagnostics.

• Imaging is the largest segment, generating 2021 sales of about $10 billion. Ultrasound and patient care sales came in at about $3 billion each in 2021, and pharmaceutical diagnostics generated about $2 billion. GE Healthcare aims for sales growth of around 5%, and operating profit margins in the “high teens.”

• Imaging is dramatically improving the functionality of its installed base of MRI machines, which cost millions of dollars, for about $300,000 a piece. GE has developed advanced software to reduce all the noise associated with generating an MR scan, resulting in faster, more accurate images.

• GE HealthCare CEO Peter Arduini told Barron’s the goal is to expand where and how GE tools are used, “to start spanning out of our space in a way that we can actually keep a foot in what we’re really good at, but step into something new.”

What’s Next: It’s too soon to say if traditional GE investors will continue to hold GE Healthcare’s shares when the spinoff happens in January. Oakmark Funds partner and U.S. equities chief investment officer Bill Nygren, whose Oakmark Select fund holds GE stock, said: “Evaluate it when it comes.”

—Al Root and Janet H. Cho

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MarketWatch Wants to Hear From You

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***

—Newsletter edited by Liz Moyer, Brian Swint and Joe Woelfel