The stock market is facing a crisis on the anniversary of the Fed hike

The S&P 500 index fell more than 4% last week, its most since September, after the collapse of high-profile Silicon Valley lender SVB Financial Group raised fears of additional risks lurking on the balance sheets of other banks. Meanwhile, questions are looming over the Fed’s policy path as the central bank enters its quiet period ahead of its March 22 rate decision.

With Fed officials remaining silent, all eyes are on the release of the consumer price index on Tuesday, after last week’s jobs data indicated that inflation may be cooling. This sets the stage for a make-or-break pull for stocks leading up to the central bank’s announcement and discussion of Chair Jerome Powell’s subsequent path.

“There is heightened sensitivity among investors to the CPI data, especially what’s happening in the banking sector and concerns that the Fed’s interest rate cycle will have an impact on the entire economy,” said Yung-yu Ma, chief investment strategist at BMO. Is thought.” Money Management. “It’s a somewhat delicate time for equities.”

The CPI report is expected to show an annual growth rate of 6% in February, down from 6.4% in January, giving further evidence of easing inflation pressures. Should that happen, it could reinforce re-emerging bets in the swaps market that the Fed will end its tightening campaign in the middle of the year and cut rates by the end of the year, anticipating an equity rebound in the second half of 2023. Will lay the foundation.

risky days

It’s been a brutal year for stocks since the Fed began its tightening campaign on March 16, 2022. Rising rates dampened the allure of technology and growth stocks for much of last year, with the Nasdaq 100 Index plunging 33% in its biggest drop since 2008. The S&P 500 also posted its biggest annual decline since the global financial crisis, falling 19%.

Stocks rallied to start 2023 but have since slid back down, with the S&P 500 essentially flat for the year. Therefore, this week’s economic data is very risky. Any sign that inflation is still stubbornly elevated could bet on a more dovish Fed, putting pressure on costlier corners of the stock market, such as technology.

Late last week, swap traders slashed bets on the Fed’s peak rate at mid-year to roughly 5.3%, down from 5.7% in September just days earlier. That shift fueled the biggest drop in two-year Treasury yields since 2008. Traders are also now favoring a quarter point Fed hike this month instead of half from the current range of 4.5%-4.75%.

Besides, the near-term concerns in the stocks are on full display. A gauge of projected S&P 500 volatility over the next two weeks — including updates on CPI and producer prices, the Fed decision and S&P Global Services PMI data — is hovering near 25, higher than expected volatility two months from now. is up about 3.2 points. This is the biggest difference since October.

“The jobs data along with the inflation print and the Fed’s rate decision will give investors a good sense of what the Fed’s path to price stability will look like,” said Quincy Crosby, chief global strategist at LPL Financial.

The key issue facing Wall Street is how close the Fed is to ending its rate hikes — a turn that has historically delivered double-digit returns for equities.

According to Carson Investment Research, the last eight hiking cycles saw the Fed continue to raise its benchmark until it was above the CPI. This means the Fed may still have more room to raise rates to control higher prices.

“It’s a very nervous market, but the Fed’s medicine is working,” said Eric Ditton, president and managing director of The Wealth Alliance. “It takes one to two years for rate hikes to filter through the economy, so the next few months will probably be bumpy for stock investors.”