Metrics that Matter

Metrics that Matter

February 20, 2024

February 20, 2024

Attached above is our weekly newsletter, The Metrics that Matter, which reviews key drivers of recent market performance and monitors important economic updates for the week ahead.

Stocks and bonds had a volatile week of trading last week as investors grappled with mixed economic readings on the inflationary environment and the state of the U.S. consumer.
 
Last Tuesday’s January CPI inflation report showed prices rose 3.1% year-over-year in January. While this marked a decrease from December’s 3.4% level and a continuation of the steady disinflationary trend, this result was above the 2.9% reading economists had been expecting. 

The core measure of inflation, which the Fed watches more closely as it removes the volatile price swings in food and energy prices, remained firm at 3.9%, matching December’s level and coming in at nearly double the Fed’s 2% target. This set off a chain reaction in markets as investors grew concerned that easing inflation readings may be plateauing in the 3-4% range and may prove to be more difficult to bring down to the Fed’s 2% target than hoped. 
 
Prior to last Tuesday’s inflation update, investors expected the Fed to begin cutting rates this Spring and were pricing in 150 bps worth of rate cuts throughout the year, as inflation appeared to be easing swiftly towards the Fed’s 2% target. However, after January’s CPI report came in slightly above expectations, investors reset their rate views and pushed back their expectations on the timing of the first rate cut. They now expect the first cut to arrive in June and are pricing in just 100 bps worth of rate cuts this year.
 
This moved investor rate expectations more in line with the Fed’s views on the appropriate policy path for the year ahead. At the December Fed meeting, the Fed’s projections showed they expected inflation to ease in the years ahead, though progress would be slow in returning to their 2% target. Their guidance was that the appropriate action would involve cutting their policy rate by 75 bps throughout this year, projecting a 4.6% Fed Funds rate by the end of 2024 (the current Fed Funds Rate range is 5.25%-5.50%, for reference).
 
While this was just one inflation reading (and we should note, this is not the Fed’s preferred inflation index), it was enough to move investors’ rate expectations more in line with the Federal Reserve’s. This caused a sell-off in bonds with the 10-Year Treasury yield spiking 14 bps on Tuesday to 4.31%, which is where it ended the week. Equities experienced a sharp selloff on Tuesday as well, before regaining their footing in the back half of the week and recouping most of Tuesday’s selloff. The S&P 500 finished the week with a slight loss, at -0.35%.

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The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.