Despite numerous Federal Reserve (Fed) officials warning investors to prepare for short-term interest rates remaining above the 5% level well into 2024, the more data-dependent bond market rallied strongly Friday after new economic reports indicated that growth and inflation are slowing. Improving news on the wage front in the December employment report eased fears of an inflationary wage-price spiral developing, while the December Institute of Supply Management (ISM) services index registered the weakest print since May 2020.
With the manufacturing ISM data already indicating weakness, the disappointing ISM services report indicates a contraction in the economy may already be at hand. Interest rates moved lower across the board and risk assets rallied on hopes that the Fed’s tightening cycle is nearing an end.
The week’s economic data is highlighted by Thursday’s Consumer Price Index report and Friday’s University of Michigan Index of Consumer Sentiment.1 Investors will be looking for more validation that the improving news on inflation and moderating growth will bring the Fed’s view more in line with the bond market.
1Source: MarketWatch- U.S. Economic Calendar; as of 1/9/23
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