An electronic stock board outside a securities firm in Tokyo, Japan, on Monday, Nov. 21, 2022. The world’s central banks must keep raising interest rates to fight soaring and pervasive inflation, even as the global economy sinks into a significant slowdown, the OECD said. Photographer: SeongJoon Cho/Bloomberg
Stocks dropped during the final stretch of Tuesday’s session and bonds pared earlier losses as investors rounded out a brutal month for both assets with low-conviction moves.
The S&P 500 fell 2.6% in February. The Nasdaq 100 didn’t manage to avert a monthly decline either. A dollar index rose the most this month since September. The benchmark 10-year Treasury yield, meanwhile, climbed more than 40 basis points in February.
On Tuesday, Treasuries pared earlier losses that had pushed the 10-year yield toward the closely watched 4% level. Bonds in Europe also fell after hot inflation data caused a reassessment of rate expectations, picking up a theme that has dominated trading in a month that saw the Federal Reserve signal its intention to ratchet rates higher than the market had been anticipating.
Investors in February grappled with realization that inflation isn’t cooling to the extent the Fed would like to see, especially as key indicators the central bank is watching came in hotter than expected. That subdued some of the optimism that had sent stocks soaring in January.
Bond traders now no longer view the odds of a Fed rate cut this year as better-than-even, a shift from what they were expecting just a month ago. Traders are pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago. Market expectations also see the European Central Bank raising rates through February 2024, with a 4% ECB terminal rate fully priced.
“This whipsaw between narratives this year – Fed pause hopes being constructive for high beta assets, recession realities being the opposite – will continue,” Lauren Goodwin, economist and portfolio strategist at New York Life Investments, wrote in a note. “For this reason, and because the hurdle rate for keeping up with inflation is so high, we believe it’s important for investors to stay invested, leveraging resilient themes.”
Traders also, once again, sifted through economic data on Tuesday. US consumer confidence declined in February because of concerns about the outlook for jobs, incomes and business conditions. US home prices, meanwhile, fell for a sixth consecutive month.
“A lot of what the Fed is doing is working,” said Eric Diton, president and managing director of the Wealth Alliance, who noted layoffs at large companies and bankruptcies in small retail firms. “But it’s not a smooth ride. You’ll get blips — January was stronger data across the board and we’ll have to see what February and March look like. But I still think the overall trend is working — inflation is coming down, but it’s going to come down at this slower pace.”
Earnings also continued to trickle in. Rivian Automotive Inc. slumped in late trading as its revenue fell short of estimates. Nextdoor Holdings Inc., meanwhile, posted sales for the quarter that beat analysts’ expectations despite a broader slowdown in the digital-advertising arena. Shares of the company rose in late trading.
