Weekly Market Update: February 20, 2023
The inflation situation remains sticky. This was reflected in the Consumer Price Index (CPI) data, which showed an increase of 0.5% in January. That figure was above the consensus expectation and, when excluding the volatile food and energy components, the core reading was also higher than anticipated. On a 12-month basis, the CPI and the core-CPI climbed 6.4% and 5.6%, respectively, both above forecast. The CPI data and the outsized January jobs gain suggest the Federal Reserve still has more work to do on inflation.
Wall Street now thinks the central bank will remain hawkish on the monetary policy front this year. The spread between the Fed’s 2023 federal funds target rate and the market expectation has narrowed in recent weeks. In general, the Fed believes that the benchmark short-term interest rate needs to move above 5.00% and stay at that level for an extended period to effectively fight inflation.The market’s previous expectation for an interest-rate pivot later this year has dissipated. In that light, the move of Fed Vice Chair Lael Brainard to a White House position should not change the course of monetary policy, as her dovish views did not prevent a long-running series of hikes.
Continued inversion of the Treasury market yield curve suggests a forthcoming recession, as do some recent corporate results. With more than two-thirds of the S&P 500 companies having reported fourth-quarter results, the consensus still looks for a nearly 5% decline in profits, which would mark the first retreat since the third quarter of 2020. The prognostications for the next few periods also are underwhelming, with many industry leaders pointing to tougher operating conditions ahead. This may be further exacerbated by the Fed raising rates into a likely period of sluggish economic growth.
Rising geopolitical tensions also bear watching. In addition to the ongoing war in Ukraine, there is increased strain in the relationship between the United States and China. The tensions intensified after a suspected Chinese surveillance balloon entered American airspace last month and was subsequently shot down by the U.S. military. This fractured relationship increases the risk for U.S. companies doing business in China.
Conclusion: The aforementioned factors remain potential headwinds for the market.