After an excellent start to 2023, aided by the Fed’s easing of expectations, February’s economic data led to a steep rise in bond yields and a decline in equity markets. The Global Bond Index fell by 3.32 percent for the month while the S&P 500 Index lost -2.61 percent. At the sector level, the worst performers were energy (-7.10%), REITs (-6.20%), and utilities (-5.90%) while the only positive sector in the month was the one for technology (+0.40%). The 2YR10YR spread continued its reversal, closing the month at -89bp.
The key factor was undoubtedly the less optimistic sentiment given by interest rate expectations. While at the end of January ’23, they were still discounting three 25-basis-point rate hikes (terminal rate 5.25%) and expecting two interest rate cuts by the end of 2023. In February investors began to discount four 25-basis-point rate hikes (terminal rate 5.50%) with no cuts by the end of the year, given that there is still a long way to go to reach the Fed’s inflation target.
In macroeconomic terms, the labor market still seemed very tense and complicated: the Change in Nonfarm Payrolls figure was +517,000, higher than expected +180,000 and higher than the previous figure of +260,000 (revised upward), the Average Hourly Earnings YoY% was 4.40%, higher than expected 4.30% but lower than the previous figure of 4.80%. Inflation data were higher than expected: the CPI Index rose 6.40% compared to expectations of 6.20%, while the core figure (ex-food and energy) rose 5.60%, higher than expectations of 5.50%.
In terms of Earning Season, almost all companies in the S&P 500 reported fourth-quarter earnings: about 70% reported positive EPS surprises while earnings growth was led by energy, consumer staples, and consumer discretionary stocks while the biggest declines were in the industrial sector.
Under our watchful lens remain the upcoming data releases on inflation, employment, and retail sales. Of particular note is the March 22 FOMC decision where the market expects a new 25 basis point hike, although several committee members favor a 50-point increase.
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