Equities fell in the last minutes of Tuesday’s session, while bonds recovered previous losses, as investors completed a dismal month for both assets with low-conviction swings.
In February, the S&P 500 lost 2.6%. The Nasdaq 100 also failed to avoid a monthly drop. The dollar index rose the most this month since September.Nevertheless, the benchmark 10-year Treasury yield increased by more than 40 basis points in February.
On Tuesday, Treasuries trimmed previous losses that had pushed the 10-year yield towards the carefully monitored 4% mark. Bonds in Europe sank as a result of hot inflation data, which forced a reconsideration of rate expectations, continuing a trend that has dominated trade in a month that saw the Federal Reserve telegraph its plan to raise rates higher than the market had anticipated.
In February, investors battled with the notion that inflation isn’t falling to the amount that the Fed would like to see, especially when key indicators monitored by the central bank came in hotter than expected. This dampened some of the enthusiasm that had propelled markets upward in January.
Bond traders now believe the prospects of a Fed rate drop this year are less than even, a change from what they expected only a month ago. Traders expect US interest rates to peak at 5.4% this year, up from around 5% only a month ago. The European Central Bank is likewise expected to raise rates until February 2024, with a 4% ECB terminal rate fully priced.
“This whipsaw between narratives this year will continue,” wrote Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a note.”For this reason, and because the hurdle rate for keeping up with inflation is so high, we believe it’s important for investors to stay invested, leveraging resilient themes.”
On Tuesday, traders went through economic data once more. American consumer confidence dropped in February because of concerns about the prospects for employment, earnings, and business conditions. However, housing prices in the United States declined for the sixth month in a row.
“A lot of what the Fed is doing is working,” said Eric Diton, president and managing director of the Wealth Alliance, who noted layoffs at large companies and bankruptcies at small retail firms. “But it’s not a smooth ride.” You’ll get blips; January had stronger data across the board, and we’ll have to see what February and March look like. But I still think the overall trend is workingaid Eric Diton, president and managing director of the Wealth Alliance, who noted layoffs at large companies and bankruptcies at small retail firms. “But it’s not a smooth ride.” You’ll get blips; January had stronger data across the board, and we’ll have to see what February and March look like. But I still think the overall trend is working—the inflation is coming down, but it’s going to come down at this slower pace.
Profits have also been trickling in. Rivian Automotive Inc. dipped in late trade as its sales fell short of expectations. Meanwhile, Nextdoor Holdings Inc. reported quarterly sales that exceeded analysts’ forecasts amid a general slump in the digital advertising sector. In late trading, the company’s stock surged.