Market Pulse

In focus

A little more than one year after the Federal Reserve (Fed) began raising interest rates, last week’s hike may have been the Fed’s final increase for this cycle. The transformation of market expectations from just a few weeks ago was dramatic as traders took off bets that the Fed would have to keep hiking and instead have now turned to how many cuts may be coming this year. The recent banking turmoil has offered one answer to the question of, “When will the Fed’s tighter policy have an effect on the economy?” and investors are taking notice.

The broader stock market rose last week with focus shifting to a more dovish Fed in the coming year. Mega-cap tech names led the way higher whereas smaller cap stocks were barely positive on the week. Underneath the surface, the regional banking index hit a new low on Thursday before rebounding again on Friday as the sector continues to see volatility.

The past two weeks also saw a sea change in how stocks and bonds are correlated. For much of last year, bonds and stocks moved in the same direction. Over the past several weeks the traditional relationship of bonds zigging when stocks zag has come back. Bond yields dropped again last week as traders shifted focus from a hiking Fed to growth concerns. The 2-/10-year U.S. Treasury curve steepened last week from being deeply inverted. The curve typically re-steepens like this when the market thinks a recession is more imminent. 

A look back

• Global stocks were positive last week, with emerging markets leading the way, up more than 2% on the back of markets perceiving that central banks are nearing their end game.
• U.S. Treasury yields fell again last week with the short end falling more than the long end, steepening the curve, even though it mainly stayed inverted.
• The Fed raised their benchmark interest rate by 0.25% as markets had expected, while they remained determined to combat inflation.

A look ahead

• Consumer sentiment will be a focus this week in economic data as two surveys will show how the banking sector’s turmoil has affected individual’s expectations.
• Nine Fed speakers will try to combat the market’s disconnect of expecting multiple rate cuts while the Fed still predicts none.
• Economic Releases: Conf. Board Consumer Confidence, Pending Home Sales, Personal Income and Spending, PCE Deflator, U. of Michigan Sentiment.

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