File photo: workers at the New York Stock Exchange (REUTERS / Andrew Kelly)
Stocks headed toward their best day in at least a month on Friday and rebounded after several weeks of decline. The S&P 500 rose 1.6% and had its first winning week in four. It has found some stability after the rapid ups and downs at the beginning of the year.
The Dow Jones Industrial Average rose 1.2 percent, while the Nasdaq Composite rose 2 percent.
Lately, the main indicator for the markets has been where inflation is headed and what the Federal Reserve will do about it. “I’d love to talk about other things, but all that matters is the Federal Reserve and the trajectory of inflation,” said Amanda Agati, chief investment officer at PNC Asset Management.
Stocks had one of the best weeks of the year (REUTERS/Brendan McDermid)
Earlier in the year, Wall Street rallied in the hope that cooling inflation would prompt the Federal Reserve to ease its rate hikes. These increases can reduce inflation by slowing the economy, but they also increase the risk of a subsequent recession and hurt investment prices.
Last month, the rally reversed after several reports on the economy turned out to be more bullish than expected. They included data on the labor market, consumer spending and inflation itself at multiple levels.
The solidity of the data raised fears that inflation would continue to be pushed upwards. That forced Wall Street to abandon its hopes of rate cuts this year and raise its expectations for how far rates would go.
More data emerged on Friday showing that the economy is in better shape than previously thought: growth in the service sector last month was slightly higher than economists expected. It bodes well for the economy and helps calm concerns about an impending recession, especially when the manufacturing sector has been struggling. But it could also increase pressure on inflation.
FILE PHOTO: A trader works at the New York Stock Exchange (REUTERS/Brendan McDermid)
Rather than send stocks lower and yields higher, as stronger-than-expected data did for much of last month, markets reacted in the opposite way.
The yield on the 10-year Treasury note eased to 3.96% from 4.06% on Thursday. This is a respite from last month’s rally as expectations of a firmer Federal Reserve rose. The two-year yield, which moves more in line with expectations for Fed action, also fell modestly.
Beneath the surface of the report was some potentially encouraging data for inflation. Prices paid by service organizations continue to rise, but growth slowed in February.
“We started the year with a crazy, crazy or even crazy market rally that didn’t make any sense,” Agati said. “That delusion is clearly still sitting in the background, although we are starting to get some of that reality check.”
In his view, the Federal Reserve will have to raise interest rates even more than the market expects due to the stubbornness of inflation. With corporate profits down and a further decline expected due to a mild to moderate recession, he believes the stock market will eventually fall before stagnating for a while and gradually rising again, reminiscent of the shape of a bathtub. .
“It will be a longer hardening cycle,” says Agati. “Investors are so used to high volatility and breakneck speed that they want everything to happen immediately. The market tries to fix the price in one go. It will take longer for the Federal Reserve to stop taking the reins.”
The Federal Reserve’s next decision on interest rates is scheduled for the end of this month. Before then, the reports on the strength of the labor market and on inflation will probably have a big impact on the market and on expectations about what the Federal Reserve will do.
Last month, the Federal Reserve reduced the magnitude of its rate hikes and highlighted the progress made in the fight against inflation. He also suggested that there could be two more rate hikes. But strong data since then has raised concerns that the Federal Reserve could not only raise rates by at least three times more, but also reduce the magnitude of the hikes.
(With information from AP)