US Shares Close Mixed As Traders Hunt For Fed’s Policy Direction

US equities were mixed throughout Friday but eventually closed higher for the week after a streak of up and down days on Wall Street as investors digest the path ahead for the US central bank’s interest rate hikes and a host of new sanctions imposed by Western nations against Russia.

The S&P 500 Index was up 0.5% and the Dow Jones Industrial Average registered a 150-point, or about 0.4%, gain, with both benchmarks logging a second straight week of gains. The Nasdaq Composite climbed back from session lows but closed just below breakeven after the index was dragged down by sales of tech stocks as bond yields climbed. The 10-year Treasury benchmark rose to yield 2.5%.

Despite the ongoing geopolitical conflict, stocks have remained relatively resilient this week in the face of upbeat economic data and a chorus of commentary from Federal Reserve officials reiterating the central bank’s more hawkish path forward to rein in inflation.

Developments in Russia’s war in Ukraine remained in focus as President Joe Biden met with NATO allies in Europe. The US leveled a fresh set of sanctions against Russia and vowed to provide more aid to Ukraine. Biden also said he would support removing Russia from the G20.

In one of the latest data points underscoring the ultra-tight labour market, weekly jobless claims set the lowest level since 1969 last week, as companies held onto their existing workers amid widespread labor shortages.

With hot inflation running at the hottest level in 40 years, Fed’s policymakers have stepped up talk of tightening monetary policy. Chicago Federal Reserve President Charles Evans said Thursday he was “open” to the notion of a 50 basis-point interest rate hike at a forthcoming Fed meeting if needed.

This echoed remarks from other Fed policymakers including San Francisco Fed President Mary Daly, who said earlier this week that if the Fed needed to do 50 basis points, then “50 is what we’ll do.” Fed Chair Jerome Powell earlier this week also signaled willingness to roll out a larger-than-typical 50-basis point rate hike to address inflation, if deemed necessary.

While prospects of higher interest rates and tighter financial conditions were met with consternation among investors and choppiness in markets earlier this year, traders have begun to digest the prospects of a more hawkish Fed. Still, some strategists cautioned that volatility would likely still be in the cards in the near-term.

As far as catalysts, there is a lot of stuff out there. There is the war in Ukraine. The market’s not moving as much on the day-to-day headlines there, but it does not mean that there still couldn’t be a major catalyst from that event, either to the upside or the downside. Any hints from Fed officials as May’s FOMC meeting looms are significant, particularly the talk about 50 basis point rate hikes or balance sheet reduction or what that might look like could be a catalyst.

Money managers are holding excess cash, more than normal, almost 6% on average in cash. Volatility is over. While traders are happy about some good market bounces on the upside, they are looking also to see what’s going to happen going forward.