The week in review
- Core durable goods orders: 0.7% m/m
- Pending home sales: 8.1% m/m
- Consumer confidence: 102.9
- Mfg./Services PMI: 47.3/50.6
The week ahead
- JOLTs
- Nonfarm payrolls
Thought of the Week
Recent unexpectedly strong economic data have caused U.S. investors to reassess their outlook on U.S. monetary policy. After February’s Federal Open Market Committee (FOMC) meeting, federal funds futures were pricing in a terminal rate of 4.9% and a year-end rate of 4.4%, implying two rate cuts by the end of 2023. However, continued labor market momentum, surging retail sales and strong CPI and PCE prints released in February suggest that the economy and inflation may prove more resilient than initially anticipated. Markets are now more hawkish, pricing in a terminal rate of 5.4% and no cuts until 2024. This implies three hikes with the possibility of a fourth at the July meeting. Notably, persistent inflation fears have materialized in Europe as well, and markets now expect the European Central Bank to hike to a terminal rate of 3.9%.
In February, markets suffered as investors grappled with the prospect of higher rates for longer. The S&P 500 fell 2.6%, while the 2-year Treasury yield recently climbed to a cycle high of 4.9% and the 10-year yield breached 4%. Looking ahead, we remain cautious toward equities. Although valuations have improved after February’s sell-off, the S&P’s forward P/E ratio remains slightly above average levels, indicating that equities may come under further pressure due to higher rates. However, despite the recent back up in yields, we expect the economy will eventually slow, inflation will fall and monetary policy will become looser. Therefore, bonds look attractive at current valuations and once again offer investors income and diversification benefits.
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Originally Posted March 6, 2023 – Weekly Market Recap
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Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.
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