Sightline Weekly Market Update: The Impact of Higher Interest Rates on the Economy

Last week ended with equity markets in varied states as investors anxiously waited for Q1 earnings reports. According to FactSet, with 18% of the S&P 500 companies reporting, earnings have declined 6.2%. In addition, 76% of these companies reported earnings surprises – lower than the five-year average of 77%, but higher than the 10-year average of 73%. The most significant contributor to positive earnings surprises came from the healthcare sector, and the energy sector experienced the largest downward revisions. Five of the eleven sectors reported year-over-year earnings growth, led by the consumer discretionary and industrials sectors. On the other hand, six sectors, including materials, health care, information technology and communication services, are reported (or are expected to report) a year-over-year decline in earnings.1 European equities were mixed, recording modest gains with the STOXX Europe 600 (0.45%), Germany’s DAX (0.47%) and the UK’s FTSE 100 (0.54%), while Italy’s FTSE MIB slipped modestly (0.45%). 

On Monday, in the first of the regional reports, the New York Fed’s Empire State Business Conditions Index – a gauge of manufacturing activity in the state – unexpectedly jumped 35.4 points to bring the index back into a positive 10.8 in April after five months of declines. This was the result of a significant demand for new orders at a one-year high of 25.1 from a negative 21.7, employment being in the negative but slowing at negative eight versus a negative 10.1, as well as price pressures fading to 33 versus 41.9 a month earlier. New York Empire State Manufacturing Index is based on data compiled from a survey of 200 executives from companies in the manufacturing sector in New York State. Participants report the change in 11 indicators, including the level of general business activity, new orders, shipments, inventories, number of employees, delivery time, capital expenditure from the previous month and the likely direction of these indicators in six months. A reading above 0 indicates manufacturing activity is expanding, and below 0 is contracting.2

On Tuesday, the government reported that single-family housing starts rose 2.7% in March to an annualized rate of 861,000. Overall, including the construction of apartments, new homes fell 0.8% in March to an annualized rate of 1.42 million. Building permits, an indication of future construction, fell 8.8% to 1.41 million. Permits for single-family homes increased by 4.1%, whereas permits for apartments with over five units fell by 24.3%. Year-over-year housing starts are down 17.2% over last year.3 

On Thursday, the initial jobless claims, as the US Department of Labor reported, increased by 5,000 from the previous week to 245,000. The number of claims from all benefit programs for the week ending April 1 was 1,821,910 – a decrease of 50,026 from the last week.4 Also on Thursday, the Federal Reserve Bank of Philadelphia reported its gauge of regional business activity fell to a negative 31.3 in April from a negative 23.2 in March. The latest reading is the eighth consecutive negative reading and the lowest since May 2020. Of interest, 59% of the companies surveyed in the report declared no change, and 35% reported overwhelming decreases. New orders improved by 6 points to a negative 22.7 in April, employment remained steady, while the index rose 10 points to near zero, and the shipment index rose 18 points, remaining a negative 7.3. Overall, while there is improvement in business activity, manufacturing continues to face challenges from higher interest rates and slowing demand.5

In another signal of a possible recession later in the year, the Conference Board reported that the Leading Economic Index fell by 1.2% in March to 108.4. The LEI is down 4.5% over the last six months and down 8% overall in the previous year. The March reading is the 12th consecutive monthly decline.6 

On Friday, the S&P Global Flash US PMI Services purchasing managers’ index (PMI) rose to a 12-month high at 53.7 in April from 52.6 in March. The manufacturing sector’s PMI also rose to an 11-month high of 50.4 from 49.2 in March and joined the services sector with an expansionary reading over 50. Solid demand in new orders at U.S. firms increased at the sharpest rate in 11 months in April on improved customer confidence, successful market strategies and recent client acquisition. As a result, domestic demand increased, while new export orders continued to contract.7   

While we are closer to the end of rate hikes, the impact of higher interest rates usually takes 12 to 18 months to impact economic activity. Indeed, the rapid pace of interest rate increases has already affected the consumer, particularly in the lower-income strata. The extended impact of rates on the general economy remains to be seen, especially if rates move higher and hold longer than market participants expect. Conflicting data continues to challenge central bankers and will likely do so for some time, creating uncertainty for equities and fixed-income investors.









Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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