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Market wrap-up — March 7, 2023

The main US equity index, the S&P 500 successfully tested its 200-day moving average on Thursday as it manages to bounce back and to close above it. The index could even reclaim its 50-day moving average on the next day. And looking at the strong macroeconomic data and the hawkish comments we heard from central bankers last week, that rebound was clearly not a given. But a single sentence was enough to bring positivism to trading floors. Raphael Bostic, President of the Atlanta Fed alluded to a break in the rate hike cycle around the summer. Exactly what the market wanted to hear so it was enough to occult any bad news. Fun fact, Mr Bostic does not have voting rights in the FOMC currently. But anyway, the 10Y US yield broke its upward trend after reaching 4% following the record move of the Eurozone CPI (Consumer Price Index). As I wrote last week, it was the economic data to watch.

The Core CPI reached a record high of 5.60% in February while economists expected 5.30%, the same level as January. If this kind of data persist, a 4% terminal rate could become a reality although 2 months ago the market was largely discounting such a possibility when ECB’s Lagarde first mentioned it. Pierre Wunsch from the ECB said last week that unless they receive some clear signs that inflation comes down, they will have to do more and that 4% would not be off the table.

Talking about higher rates, 30-year mortgage rates have exceeded 7%, which is a big issue for the housing market. But there is good news to it. Housing is one of the stickiest parts of inflation, so a decline in home prices now is dovish, as it implies that the inflation pressure will soften at some point.

But for now, traders are worried by what’s coming ahead and for the first time since a long time, fed funds are pointing to a terminal rate at 5.50% as some Fed officials say recent strong economic data allows them to hike rates faster and/or higher than they previously could.

And that happened even before Jerome Powell’s speech earlier today in front of the Congress. Tomorrow he also be answering questions from American lawmakers. We were hoping that his words would give us indications on what the fed thinks about inflation and the rate path for the next few months. And they did, but what we heard did nothing to appease the markets. The WTI lost 3% right away, the S&P gave back 1.50%, so did Bitcoin.

Jerome Powell said what we could all witness, but many did not want to face the reality: US economic data are more resilient than expected so one could expect rates to be pushed higher than anticipated.

With strong data like the lowest unemployment rate in more than 50 years, Fed officials feel that they have some room to raise rates without hampering growth. Therefore, one of the main events to watch is the Initial Jobless Claims report on Thursday.

Johan Thomyris



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