New York (CNN) The investor perspective has changed fundamentally: Bad news is no longer good news.
For the past year, Wall Street has been hoping for cool monthly economic data that would encourage the Federal Reserve to halt its aggressive pace of rate hikes to tame inflation.
But at its March meeting – just days after a series of bank failures raised concerns about the stability of the economy – the central bank signaled that it plans to pause interest rate hikes sometime this year. With an end to rate hikes in sight, investors have stopped trying to guess what the Fed’s next move will be, turning instead to the health of the economy.
It means that, While weaker economic data used to signal good news – that the Fed might stop raising rates – now slowing economic data simply suggests that the economy is weakening. That has investors concerned that the slowing economy could slip into recession.
what happened last week Markets teetered after a slew of economic reports signaled that the sizzling job market is finally cooling (more on that later) and sent warning signs on Wall Street.
Accordingly, investors are dumping high-growth, large-cap stocks that have rallied recently to plunge into defensive stocks in sectors like healthcare and consumer staples.
While tech stocks recovered somewhat by the end of the short trading week – markets closed on Good Friday – the Nasdaq Composite was still down 1.1%. The broad-based S&P 500 fell 0.1% and the blue-chip Dow Jones Industrial Average gained 0.6%.
What does this mean for the markets? Now that Wall Street is in bad news is bad news and good news is good news mode, it will be looking for signs that the economy remains resilient.
What hasn’t changed is that investors still want to see cooling inflation data. While the central bank has signaled that it will suspend rate hikes this year, its actions to date have done so only somewhat stabilized prices. The personal consumption spending index, the Fed’s preferred indicator of inflation, rose 5% in the 12 months to February — well above its 2% inflation target.
Additionally, Wall Street may be overly optimistic about how the Fed will act going forward: some investors expect the central bank to cut rates several times this year, although the central bank indicated last month that it has no intention of doing so lower prices in 2023.
It’s unclear how markets will react if the Fed doesn’t cut rates this year. But there’s unlikely to be a significant rally unless the central bank does a nudge or at least hints it plans to do so soon, said George Cipolloni, portfolio manager at Penn Mutual Asset Management.
Comments that are hawkish or reveal inflation concerns could hurt markets, he adds. “It keeps that boiling point and temperature a little high.”
What’s next? The Fed will hold its next meeting in early May. Until then, it needs to analyze several economic reports to get a sense of how the economy is doing and what it can cope with. Markets are currently expecting the Fed to hike rates by a quarter point to the CME FedWatch tool.
Is the labor market cooling off?
The job market seems to be cooling off a bit, at least according to the data released last week. But it is still far too early to assume that the labor market has lost strength.
President Joe Biden said in a statement Friday that the March data is “a good jobs report for hard-working Americans.”
The March jobs report revealed that US employers added a fewer-than-expected 236,000 jobs last month. Economists were expecting net job gains of 239,000 for the month, according to Refinitiv.
The unemployment rate fell to 3.5%, according to the Bureau of Labor Statistics. This is below expectations of remaining stable 3.6%.
The job report was also the first in 12 months to fall short of expectations.
But that doesn’t mean the job market isn’t strong anymore.
“The labor market is showing signs of cooling, but it remains very tight,” Bank of America researchers wrote in a statement on Friday.
However, other data released last week suggests cracks are finally forming in the job market. The Job Openings and Labor Turnover Survey for February showed last week that the number of available jobs in the United States fell to its lowest level since May 2021. ADP’s private sector payroll report fell far short of expectations.
For the Fed, this means the slowdown in the latest jobs report is unlikely to be enough for the central bank to pause rates at its next meeting.
“The Fed will most likely hike rates in May as the labor market continues to weather the cumulative impact of rate hikes that began over a year ago,” said Quincy Krosby, chief global strategist at LPL Financial.
Next
Monday: Wholesale Stocks.
Tuesday: NFIB Small Business Optimism Index. Earnings from CarMax (KMX), Albertsons (ACI) and First Republic Bank (FRC).
Wednesday: CPI and minutes of FOMC meeting.
Thursday: OPEC monthly report and producer price index. Delta Air Lines (DAL) revenue.
Friday: University of Michigan Retail Sales and Consumer Sentiment Survey. Earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Citigroup (C) and PNC Financial Services (PNC).
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