Following the most aggressive monetary tightening cycle in over four decades — including four consecutive 75-basis-point rate hikes last year — investors entered 2023 optimistic that the job of the Federal Reserve (Fed) was nearly done. However, the unexpectedly strong January jobs report coupled with a string of disappointing inflation reports in February are likely to force Fed policymakers to reconsider the duration (and potentially the size) of rate hikes this year.
The rapid repricing of interest rates across the yield curve led to a quick end for January’s so-called “everything rally.” In just one example of the dramatic change in expectations for Fed policy, the January 2024 federal funds rate futures contract has increased by nearly 100 basis points since mid-January — from approximately 4.3% to 5.3% today.1 A sustained rally in risk assets is unlikely until investors gain more clarity on the end points, both in time and level, for Fed tightening.
This week’s economic calendar is highlighted by new housing data on Monday and Tuesday, in addition to manufacturing and service sector purchasing managers’ reports out Wednesday and Friday, respectively.2
1Source: MarketWatch- 30-Day U.S. Federal Funds Jan 2024; as of 2/27/23
2Source: MarketWatch- U.S. Economic Calendar; as of 2/27/23
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