Improving Global Purchasing Managers’ Index (“PMIs”) data and a much better-than-expected employment report have recently given investors new confidence that the economy can avert a near-term recession, boosting market sentiment and stock prices. Meanwhile, the US Federal Reserve (“Fed”) has remained largely steadfast in its hawkish messaging, increasing the likelihood of additional 0.25% rate hikes in both March and May. However, the major benchmarks ended lower in a week with relatively few important economic releases or other concrete drivers of sentiment. Sector performance was relatively uniform within the S&P 500 Index, with energy stocks being the notable upside outlier and communication services shares the prominent laggard.

Statements from Federal Reserve officials appeared to send stocks in opposite directions on Tuesday and Wednesday. Stocks rallied Tuesday, after Fed Chair Jerome Powell, in a question-and-answer session at the Economic Club of Washington, repeated an earlier reference to the disinflation process having started. Some investors had worried that the major upside surprise in the January payrolls report, released the previous Friday, might cause Powell to change his tone. However, a series of apparently hawkish comments from other Fed officials the following day seemed to send stocks back lower.

The yield on the benchmark 10-year US Treasury note increased solidly over the week as investors appeared to continue digesting the previous week’s strong January payrolls report. The yield curve inverted further - Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades - as fears grew that the Fed would need to push the economy into recession in order to tame inflation.

This week, attention will shift to a slew of inflation data for January. After a string of months of promising disinflation progress, January Consumer Price Index (“CPI”) will likely show a bounce in headline inflation due to higher energy prices and persistent owners' equivalent rent inflation. Manheim data last week also showed that used car prices spiked in January, breaking a trend of sharply falling auction prices and warning of a turn in a major contributor to lower core inflation in recent months. Other data also show price pressures unwinding convincingly; pricing indicators from the manufacturing and services PMI surveys have declined sharply since mid-2022, down to a combined value of 56 from a peak of 85 last March.

The disinflationary wave has room to run, but progress won’t be linear and inflation data in the very near term could plateau or even turn higher. Still, gathering evidence on a broad weakening of economic growth and inflation should soon lead the Fed to reverse course. For investors, it’s also important to take a longer-term view amidst shifting economic data and position portfolios for the eventual return to a slow-growth and low inflation economy.