Global stocks retreated last week, with investors processing the possibility that the Federal Reserve may have to keep rates higher for a longer period than expected, carefully assessing its moves to tackle inflation.
After a flurry of hawkish comments from US officials and a strong employment report, Wall Street increased its bets on the Fed’s peak rate to approximately 5.2% from around 5% earlier this month. Traders who had been planning on the central bank raising rates just once more—in March—are now faced with betting on at least three additional increases.
The Fed’s capacity to prevent inflation in the midst of the most aggressive tightening cycle in decades will be put to the test on Tuesday with the release of the consumer price index. According to Ian Lyngen of BMO Capital Markets, Core CPI will either show the need to enter more restrictive territory or show how far policymakers have come in securing the anchor of inflation expectations.
The 10-year Treasury yield increased to about 3.75%. Friday’s interest-rate options trading includes a sizable, seemingly new position that stands to gain if the rate rises to 4% in the next week. The tech sector was severely impacted by the increase in rates, with the Nasdaq 100 trailing other indices. The S&P 500 suffered its worst week since December, albeit it ended the day with a little gain.
After an irrational risk rally that resisted Fed hawkishness, rational traders are now becoming better at hedging their positions.
In corporate news, Lyft Inc. had its biggest ever decline after anticipating considerably lower profits than anticipated and announcing price reductions in an effort to draw and retain consumers. Expedia Group Inc. officials reassured investors following the company’s weaker-than-expected fourth-quarter earnings by providing an upbeat prognosis for travel demand in the current quarter.
Given the more rigorous than typical Fed stress tests, the biggest banks in America are unlikely to resume share buybacks anytime soon. This is according to Wells Fargo analyst Mike Mayo.
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