Markets fatigued in February
The sizzling rally in January may have gone too far and markets began to cool in February in response to signals that the economy remains too hot. Central banks may not be done in tightening just yet. Recent surprise in labour market data and an uptick in inflation suggests that rates will need to move even higher and will likely stay higher for longer than anticipated last month. The Federal Reserve and other global central banks will likely have to continue on their path of tightening and more rate hikes may be required to tame the sticky inflation. The markets peaked in early February and began to taper in the middle of the month as investors questioned the sustainability of the rally given rich valuations and elevated recession risks. The risk-on sentiment quickly disappeared after a flash appearance in January. The S&P 500 index ended the month just below the 4000 level that it has been hovering around since mid-2022.
The NEI perspective
Recession narrative evolves as economies continue to show resilience and pockets of strength. The softlanding/hard-landing narrative has pivoted towards a potential “no-landing” scenario which points to continued by anemic economic growth, low unemployment and moderating inflation.
Inflation pressures re-ignited as some countries like the U.S., Germany and Japan saw surprise upticks in their January inflation data as spending on goods and services picked up. While consumer demand for goods is falling, the combination of job gains, higher consumer demand and rising wages will likely continue to put pressures on service inflation.
Peak rates moved higher as the Federal Reserve turned more hawkish in February and expressed the need to raise rates higher as the labour market remains tight and inflation is stubborn. The expectation for peak rates in the US moved much higher to over 5.5% in June 2023 and will likely remain above 5% through early 2024.