Market Pulse

In focus

After an excellent start to the year, which saw the S&P 500 up nearly 8% through February 3, equity markets have posted three consecutive losing weeks. Concerns that inflation may be reaccelerating sent stocks tumbling last week, as investors became increasingly worried that the Federal Reserve (Fed) will raise interest rates more than previously expected. The Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (PCE), reinforced these concerns by rising in January at the fastest pace since June.

Minutes from the February Federal Open Market Committee (FOMC) meeting showed that Fed officials discussed the need for “ongoing” rate hikes until there is more evidence of easing inflation. Last week’s PCE release, coupled with stronger than expected economic and inflation data following the February meeting, led investors to recalibrate their expectations on the path of interest rates. Futures markets are now pricing in a 20% chance of a 0.50% rate increase at the March FOMC meeting, a stark contrast to the less than 1% probability that was implied a month ago. A persistently-strong labor market has also been a catalyst for this shift in expectations, as initial jobless claims have come in below 200k for five straight weeks.

This has investors bracing for the possibility of continued choppy waters in the coming weeks.

A look back

• International and U.S. stocks fell as the S&P 500 dropped over 2.6% in its worst week since early December. International developed markets led the U.S. for the third-straight week.
• Yields soared across the curve and the 2-/10- year inversion widened. The 2-year yield reached its highest level since 2007.
• January PCE brought another hotter-than- expected inflation print, and Fed officials continued to emphasize higher-for-longer rates to cool inflation. 

A look ahead

• Though earnings season is largely wrapped up, some major retailers are set to report fourth quarter results this week.
• Investors will get insight on housing prices and the strength of the U.S. manufacturing and services sectors with this week’s data.
• Economic Releases: Pending Home Sales, Durable Goods Orders, FHFA Home Price Index, Conference Board Consumer Confidence, S&P Global U.S. & ISM Manufacturing & Services.

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