Interest Rates Spike Higher on Renewed Inflation Concerns
KEENAN: Now that earnings season is winding down, investors are beginning to turn their attention to the economy and the prospect of more interest rate hikes. Next week could hold some more clues. On Monday, the NAPM, or a reading of the manufacturing sector, is due out. On Tuesday, we get the leading economic indicators for the month of March. The Fed's Beige Book comes out on Wednesday. And the grand finale is on Friday. That's the employment report for the month of April. Long-term interest rates this past week moved to their highest level in a month. By Thursday, the yield on the 30-year bond hit 6 percent. And, David, we got some bad inflation news coupled with a very strong GDP report on Thursday. Do you think the Fed is going to raise interest rates by a half percentage point May 16th?</s>JONES: No, but we're going to get more incremental hikes than the market was looking for. The market was betting on maybe one in May, another one in June. We're going to get maybe one or two more after that. I think the Fed will stick with those small hikes, though. Greenspan has used that as one of his trademarks. He certainly doesn't want to raise rates enough to crash the stock market either, so I think the idea here is to move in small but frequent steps. And then can you reverse them more quickly if you have to at some future date.</s>KEENAN: Yes, I mean, he's been treading carefully in his comments about the wealth affect and the stock market and the Fed's impact on controlling stock prices. What do you think his thoughts are on that, and have they changed?</s>JONES: Well, every time he's asked about this, he protests that he's not trying to control the stock market -- probably couldn't even if he wanted to. But there's a key point here. If he's going to slow the economy, curtail demand growth, he has to seek private borrowing costs, including corporate bond yields and mortgage rates, move up further, and he probably has to see some kind of stock market correction, since people have been tying their spending so directly to the appreciating stock portfolios they hold. So he has to have some kind of a prolonged, shallow correction here running from maybe March to September before he has a chance of curtailing demand growth. That's at least my judgment.</s>KEENAN: Vince, does interest rates start to become a problem for this stock market?</s>FARRELL: Well, I think they have been, but maybe less so going forward. But I look at the action of the broad base of financial stocks. Financials tend to start to do significantly better and sustainably better when there's still a couple of interest rate hikes left in the system. Now they're off their bottom -- and I'm putting aside right now the brokers, because they've traded very well with the initial public offering calendar -- but if you look at the broad base of financial stocks, they've very done better, but now they're churning a bit. So they're reassessing whether there's going to be just two more, and they're starting to tell you that there's going to three or four more rate increase. And I don't think the broad market can do significantly better than it has done unless financial stock assume a role of leadership. I think we'll do OK, but you've got to get through this interest rate stuff before can do OK.</s>KEENAN: Rick, do you agree?</s>WHITE: I don't know. I think your comments on the broad market are probably appropriate, and with Greenspan overhanging it's hard to see the market really rocketing from here. But I would also point out that this interest rate fear issue has been with us for the better part of ninth months or a year, and as a result there are a lot of stocks today that are quite inexpensive. So while the broad market itself could struggle, I think that there are a lot of stocks out there where you can really make a lot of money.</s>KEENAN: Such as?</s>WHITE: I think the energy sector still has room to go. This is something I've liked before. I think that operating earnings can continue to accelerate there. And then I think in some of the Bristol-Myers of the world, some companies that have reasonable valuations and reasonable growth rate that aren't quite as cyclically tied, still represent pretty good value. Another name may be BMC Software or Bell Alantic -- stocks beginning with B today.</s>KEENAN: All right. Up next, stock picks and an outlook for the economy from our experts.