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Inflation Concerns & Hawkish Fed Comments

U.S stocks closed mixed on Friday, 17th February 2023, with the Dow up but the S&P and Nasdaq down. 

The market spent most of the time in negative territory but a late round of buying prevented it from closing much lower. 

Latest data showed inflation falling ever so slightly with consumer prices rising, making investors nervous about the direction of the Fed at its next meeting. 

Bond yields reacted more to the data than the stock market. The 2-year yield jumped to the highest level since November. 

Cleveland Fed President Loretta Mester and her St. Louis counterpart, James Bullard, two of the Federal Reserve’s most hawkish policymakers, signaled they may favor returning to more significant interest-rate hikes in the future, and said they saw the case for raising rates by a half-point at the central bank’s meeting earlier this month. 

In spite of these comments, the S&P shed only 0.3% for the week, with the Dow Jones edging 0.1% lower, and the Nasdaq Composite climbing 0.4%. 

Here are the closing levels on Friday, 17th February 2023:

 Last Change %Change 
Dow Jones 33,826.69. +129.84 +0.39% 
S&P 500 4,079.09 -11.32. -0.28% 
Nasdaq Comp 11,787.27. -68.56. -0.58% 
US 10Y 3.81%   
VIX  20.02 -0.15 -0.74% 

The tug of war continues, with bulls ignoring the data and the Fed’s hawkish comments as sellers try to position for a fall in markets. 

Maybe the bulls are interpreting the data differently or are just sticking to their belief that the market has nowhere to go but up. The dip buying is still very much alive. 

It is worth noting that the two Fed officials who are advocating for 50 basis point hikes are not currently voting members of the monetary decision-making committee, which could explain why their calls are being overlooked by bullish investors. 

Even so, inflation, by most standards, is not under control yet. The tight labour market is not helping bring inflation down. 

More analysts are warning of falling valuations, the latest being JPMorgan’s Kolanovic. 

Marko Kolanovic said he is “turning more defensive,” recommending that investors fade this year’s stock rally because “a recession is currently not priced into equity markets.” 

I have posted other warnings from other prominent analyst in recent commentaries so I’m not sure if one more negative view will chase buyers away. 

There is still a strong underlying pull to buy this market and I am just not sure why this is so. 

Having said that, shorts and sellers are being frustrated by the strength of the bulls in the face of so much headwinds. This could lead to another round of short covering and FOMO, something I do not support but you can’t just rule it out. 

This reminds me of previous bubbles where bulls ignore valuations and market conditions like higher rates. 

Just as you can’t rule out a rally, you should not rule out a bubble bursting as well. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes.
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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