After a strong January, major U.S. equity indexes experienced declines in February as government bond yields rose. Economic data remained strong throughout the month, including job and inflation metrics, leading the market to expect further interest rate hikes by the Federal Reserve.
Starting out last month, the Fed raised rates by 25 basis points at its February 1st meeting. Market participants widely expected the 25-basis-point hike.
The statement released with the rate hike had somewhat of a dovish tone, unlike the hawkish tones we have become accustomed to, but with a bit of mixed messaging[iv]. The Fed acknowledged that inflation has eased somewhat, which was welcome news. However, Federal Reserve Chair Jerome Powell said[v], “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”
U.S. equity markets initially moved higher on the Fed’s acknowledgment that inflation has eased somewhat. But after digesting the full message—which noted “data-dependency” for the future direction of policy and having “a long way to go”—markets turned negative on the day and kept the negative tone throughout the rest of the month.
Hot Jobs Number
After Powell reiterated that policy would heavily depend on economic data, attention quickly turned to the upcoming non-farm payrolls data. The jobs number came in super-hot, showing 517,000 jobs created[vi] versus 183,000 expected.
Markets reacted to the downside on the data release, although in an orderly and muted fashion unlike the loud outfits worn at this year’s Grammys. (Cue Harry Styles’ silver sequined jumpsuit.)😮
Inflation Ran Hot Again
Following Fed commentary on “data dependency” and several strong economic data releases, all eyes were on the next release: the January Consumer Price Index.
On Valentine’s Day, the Fed’s sweet treat showed consumer pricing running hotter than expected at a 6.4% year-over-year rise versus estimates for 6.2%. On a month-over-month basis, data[vii] showed a 0.5% increase in consumer pricing vs. the 0.4% expected.
The usual suspects were the culprits for the rise; necessities like shelter (including rent), energy, and food all saw prices climb[viii] in January. Pesky interest rates are keeping would-be homebuyers priced out of the market in some parts of the states, which is increasing rental costs as well. And families feeding growing children can tell you exactly how much their grocery bill has gone up since last year.
The mid-month data further strengthened the conviction that more rate hikes would be on the table. The result was softening equity index pricing and higher government bond yields[ix] throughout February.
China’s Purchasing Managers’ Index for the manufacturing industry hit 52.6 in February, its highest level since April 2012, according to data[xi] released Wednesday by the National Bureau of Statistics.
This followed the January reading of 50.1, which was a sharp increase from the month before and came as disruptions caused by the abrupt end of pandemic restrictions faded. China scrapped most of its restrictions in early December.
Signs of global growth are encouraging for the economy here at home.
Earnings season for the fourth quarter is winding down, and here is a quick synopsis: For the 489 S&P 500 companies that have reported Q4 results as of the time of writing, total earnings are down -5.8% from the same period last year with +5.8% higher revenues. 70.8% beat earnings per share (EPS) estimates and 70.3% beat revenue estimates, according to data[xii] from Zacks.
Overview and Outlook
February featured a sentiment shift from the rising equity indexes in January. Data from China provides a positive element of support for the broader equity market picture, but the U.S. Fed’s focus on bringing inflation back to its target rate remains the front-and-center narrative.
Eventually, the driving force of U.S. equities will revert to earnings and sales growth, as well as positive analyst revisions and strong forward-looking guidance. So, amid this inflation-driven period, it is vital to remain focused on these time-tested data points.
With that said, market attention now turns to the March Fed meeting taking place over the 21st and 22nd[xiv], where another hike is expected. As of March 6, expectations favor another 25-basis-point hike in March (69.4% probability) and a 50-basis-point hike showing a 30.6% probability, according to data from the CME FedWatch Tool[xv].
The current landscape could provide opportunities for investors seeking to benefit from dollar cost averaging[xvi] which is also a topic featured over on our blog. On that note, if you would like to discuss the market outlook for higher rates and explore strategies based on your investment objectives, please feel free to respond to this email or give me a call. I am always here as a resource!
[i] Hudgins, C. (2023, March 1). Spglobal.com. S&P 500 sheds 2.6% in February as inflation, interest rate worries persist. [Online] Available at: S&P 500 sheds 2.6% in February as inflation, interest rate worries persist | S&P Global Market Intelligence (spglobal.com)
[ii] Dow Jones. (2023, February 28). Morningstar.com. NASDAQ Composite Falls 1.11% This Month to 11455.54 – Data Talk. [Online] Available at: NASDAQ Composite Falls 1.11% This Month to 11455.54 — Data Talk | Morningstar
[iii] Hudgins, C. (2023, March 1). Spglobal.com. S&P 500 sheds 2.6% in February as inflation, interest rate worries persist. [Online] Available at: S&P 500 sheds 2.6% in February as inflation, interest rate worries persist | S&P Global Market Intelligence (spglobal.com)
[iv] Navellier, L. (2023, February 2). Nasdaq.com. The Fed Statement: Hawkish, Dovish, or Both? [Online] Available at: The Fed Statement: Hawkish, Dovish… or Both? | Nasdaq
[v] Cox, J. (2023, February 7). Cnbc.com. Fed Chair Powell says inflation is starting to ease, but interest rates still likely to rise. [Online] Available at: Fed Chair Powell says inflation is starting to ease, but interest rates still likely to rise (cnbc.com)
[vi] Cox, J. (2023, February 3). Cnbc.com. Jobs report shows increase of 517,000 in January, crushing estimates, as unemployment rate hit 53-year low. [Online] Available at: Jobs report January 2023: Payrolls increased by 517,000, unemployment rate at 53-year low (cnbc.com)
[viii] Mutikani, L. (2023, February 14). Reuters.com. Rents push up U.S. consumer prices; inflation gradually cooling. [Online] Available at: Rents push up U.S. consumer prices; inflation gradually cooling | Reuters
[x] He, L. (2023, March 1). Cnn.com. China’s factories just had their best month in nearly 11 years as economy rebounds after reopening. [Online] Available at: China’s factories just had their best month in 11 years | CNN Business
[xi] He, L. (2023, March 1). Cnn.com. China’s factories just had their best month in nearly 11 years as economy rebounds after reopening. [Online] Available at: China’s factories just had their best month in 11 years | CNN Business
[xii] Mian, S. (2023, March 1). Nasdaq.com. Q4 Earnings Season Is Winding Down, Let’s See What’s Next. [Online] Available at: Q4 Earnings Season Is Winding Down, Let’s See What’s Next | Nasdaq
[xiii] Butters, J. (2023, March 2). Insight.factset.com. Earnings Insight Infographic: Q4 2022 By the Numbers. [Online] Available at: Earnings Insight Infographic: Q4 2022 By the Numbers (factset.com)
[xvi] Hayes, A. (2022, August 19). Investopedia.com. Dollar-Cost Averaging (DCA) Explained With Examples and Considerations. [Online] Available at: Dollar-Cost Averaging (DCA) Explained With Examples and Considerations (investopedia.com)
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