As investors try to assess the damage from recent bank failures and ongoing concerns about the health of the global banking sector, the U.S. equity and bond markets are telling very different stories about the risks of a significant economic downturn.
Despite an uptick in interest rates to start the week, the 2-year Treasury note yield remains more than 100 basis points below the top end of the range for the federal funds rate.1 Fixed-income investors are anticipating an abrupt and material U-turn in Federal Reserve (Fed) monetary policy — the type of move that would likely only come on the heels of an economic hard landing and material decline in inflation.
In contrast, equity markets appear to be pricing in more of a “Goldilocks” scenario for the U.S. economy, with earnings and growth remaining resilient to the Fed’s aggressive monetary tightening to-date. The S&P 500 Index finished higher each of the last two weeks and remains in positive territory for the year despite emerging stresses in the global banking system.2 The mixed messaging from the stock and bond markets argues for diversification remaining the best form of risk management to help investors manage through expected volatility and the uncertain economic outlook.
This week’s economic calendar includes new data on the state of the U.S. consumer and the housing markets.3 The most-watched economic release will likely be the Personal Consumption Expenditures Price Index out Friday. Fed policymakers will be looking for the return of lower inflation prints after a disappointing 0.6% reading last month.4
Sources:
1Source: MarketWatch- U.S. 2 Year Treasury Note; as of 3/27/23
Board of Governors of the Federal Reserve System- Federal Reserve Issues FOMC Statement; 3/22/23
2Source: CNBC- S&P 500 Index; as of 3/27/23
3Source: MarketWatch- U.S. Economic Calendar; as of 3/27/23
4Source: NBC News- Inflation Cooled to 6% in February as the Federal Reserve Weighs Next Steps on Interest Rates; 3/14/23
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