Last Week on Wall Street

Last Week on WallStreet - February 25, 2023

S&P 500: -2.67% DOW: -2.99% NASDAQ: -3.33% 10-YR: 3.95%

What Happened?

After a tug-of-war in the last few weeks, sellers took firm control of markets to close out a short week on the street. The first wave of selling came during Tuesday's session as fresh economic data indicating a robust service sector drove fears of continued labor tightness and concerning wage-price dynamics. Friday's report of higher-than-expected PCE inflation fueled another selloff as the Fed may be making less headway on inflation than previously thought.

Beneath the surface, no sector was spared as all 11 finished in the red. Discretionary (-4.4%), Communications (-4.2%), and Technology (-3.8%) experienced the most damage this week. Staples (-0.1%) displayed the most resiliency followed by Materials (-1.1%).


US Economy Perks Up as Inflation Eases and Recession Worries Dim, S&P Says

  • The S&P Flash U.S. services index climbed to 50.5 from 46.8 in the prior month, marking the first positive reading since last summer
  • The S&P Global U.S. manufacturing sector index edged up to a four-month high of 47.8 from 46.9
  • Any number below 50 suggests a contracting economy
  • New orders, a sign of future sales, improved a bit in February but were still soft

The key takeaway - Not much has changed on the manufacturing side of the economy as it continues to hover in contractionary territory, illustrating the weakness in that sector. The details of the services index, however, captured markets attention primarily due to the strength displayed. While its not intuitive to think of an improved figure as a bad thing, the services sector of the economy is incredibly labor intensive and growth there indicates further tightening of the labor market. Heightened fears that this tightness leads to a wage-price spiral spooked investors upon the report's release.


Key Fed Inflation Measire Rose 0.6% in January, More Than Expected

  • The core personal consumption expenditures price index increased 0.6% for the month, and was up 4.7% from a year ago
  • Wall Street had been expecting respective readings of 0.5% and 4.4%
  • Headline inflation increased 0.6% and 5.4% respectively.
  • Consumer spending also rose more than expected as prices increased, jumping 1.8% for the month

The key takeaway - The PCE reading shows that inflation accelerated ahead of expectation to begin the year and that the disinflation seen in recent months could be moderating. The strong report adds onto data seen since the last Fed meeting that likely puts the central bank on a more restrictive path than previously expected. Strong economic, inflation, and jobs figures provide a data-driven Federal Reserve with several indications that their current stance is not yet restrictive enough, raising the odds of a policy misstep as a result of this uncertainty.


Fed Minutes Show Most Officials Favored Quarter-Point Rate Rise

  • Federal Reserve officials are signaling that a resilient U.S. economy could lead them to raise interest rates somewhat higher
  • Minutes from the Fed meeting showed most thought a slower pace of rate increases was appropriate but that some officials were concerned about moderating their policy too early
  • While a quarter-point rate hike was unanimously approved, a "few" officials indicated they would have supported a half-point hike

The key takeaway - Important to note with this story is that since the Fed meeting that produced these minutes, several data points have developed that are likely to increase the hawkishness of the FOMC. The minutes indicate that at least some of the members are concerned with not taking policy action far enough and that the committee could revert to a more restrictive stance after releasing the gas pedal somewhat recently. In this scenario, markets would have to reprice a higher-for-longer policy rate which would provide a headwind for equities.


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