Fed’s Interest Rate Hike Expectations Drive Markets Lower

On February 3, the University of Michigan’s consumer sentiment index was revised upward by 0.6 points to a 13-month high of 67.0, according to separate data.[0] This increase was driven by an improvement in the short-term economic outlook, though consumers still exhibited considerable uncertainty over the short-term inflation.[1] The Commerce Department also released the personal consumption expenditures price index which showed the cost of U.S. goods and services jumped 0.6% in January, its biggest rise since last summer.[2] This data was seen cementing expectations that the Federal Reserve will continue lifting its key interest rate above 5% in its effort to bring down inflation.

The yield on the 10-year Treasury note rose to 3.94% on Friday morning, on track for a fifth-straight weekly advance, while the 2-year Treasury was up 1 basis point at 4.712%.[3] The rate-sensitive tech stocks sent the Nasdaq down nearly 1.7%, while the S&P 500 and the Dow Jones Industrial Average also closed more than 1% lower.

Carvana (CVNA) plummeted 20.5% after the online auto dealer reported a sharp year-over-year decline in units sold (-23%) and revenue (-24%) in Q4.[1] Additionally, the company announced plans to reduce operating costs by $1 billion by the second quarter, but not with layoffs.[1]

Booking Holdings (BKNG) is up more than +1% after reporting Q4 revenue of $4.05 billion, slightly beating the consensus of $3.90 billion.[4] Quarterly earnings soared 56% a share, easily beating.[5]

As markets continue to price in a 27% chance that the central bank will raise its key rate by 50 basis points at its next meeting, with a 73% probability that the hike will match February’s 25-basis-point increase, remarks by at least one other Fed official on Friday, though, only underscored lingering worries about higher-for-longer interest rates.[3]

In conclusion, the data released on Friday confirmed the market’s expectation that the Fed will continue lifting its key interest rate above 5% in its effort to bring down inflation. This caused a sell-off in the bond market, sending yields higher, while the rate-sensitive tech stocks sent the Nasdaq down nearly 1.7%.

0. “Markets suffer worst week of 2023 on consumer and producer price reports” Courthouse News Service, 24 Feb. 2023, https://www.courthousenews.com/markets-suffer-worst-week-of-2023-on-consumer-and-producer-price-reports/

1. “Stock Market Today: Hot Inflation Data Sinks Stocks” Kiplinger’s Personal Finance, 24 Feb. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-022423-hot-inflation-data-sinks-stocks

2. “U.S. stocks end sharply lower, Dow suffers fourth straight weekly fall after Fed’s favorite inflation gauge runs hotter than expected” MarketWatch, 24 Feb. 2023, https://www.marketwatch.com/story/u-s-stock-futures-weaken-ahead-of-key-inflation-data-efb982a2

3. “Another hot inflation report sends Nasdaq, S&P 500, Dow lower (SP500)” Seeking Alpha, 24 Feb. 2023, https://seekingalpha.com/news/3940862-another-hot-inflation-report-sends-nasdaq-sp-500-dow-lower

4. “Stocks Tumble as Strong Economic Reports Bolster the Case for Tighter Fed Policy” Barchart, 24 Feb. 2023, https://www.barchart.com/story/news/14527214/stocks-tumble-as-strong-economic-reports-bolster-the-case-for-tighter-fed-policy

5. “Stocks Sell Off As Hot Inflation Revives Fed Fears: Weekly Review” Investor’s Business Daily, 24 Feb. 2023, https://www.investors.com/news/stock-market-sells-off-as-inflation-revives-fed-fears-nvidia-walmart-home-depot-earnings/