The markets fell last week after another, but expected, 75 basis point increase in the key interest rate. It was the fourth consecutive hike, and it brought interest rates to 4% in about eight months, an unprecedented pace of increases for the U.S. economy. As we wrote in last week's commentary, the catalyst for the move in US indices was not so much the rate hike itself but the prospect of future tightening. It was noted at the press conference that rate increases act with a lag relative to the real economy. However, Jerome Powell maintained his hawkish tone and that is what drove the indices down. He stressed that any discussion around stopping the hiking cycle would be "very premature". Chairman Powell also noted that recent data projected the key interest rate to be higher than what was outlined in September. At that time, the peak was projected to be around 4.6%. The consensus is now around 5.3% by the end of the first half of 2023.
From an economic perspective, higher interest rates could put downward pressure on consumption and more directly affect the most interest rate-sensitive parts of the economy, including demand for housing and borrowing. From a market perspective, higher interest rates and bond yields may weigh on the more speculative parts of the market with higher valuations. We saw this play out in the markets last week when the Nasdaq fell over 5% while the broader S&P 500 fell over 3%.
What to watch for in the week ahead
Overall, the economic calendar for the week is light and no major shifts are expected. The key event will be US inflation data. Investors will be watching for a slowdown in the inflation index. If we witness such signs, we expect this to support the market. A rise above CPI expectations will push the broad S&P 500 index towards the support zone around 3600 points.
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Risks:
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