Market Volatility Persists Amid Fed’s Uncertain Path

🗝️ Key Points

• stocks surged after Congress passed a temporary spending bill, but market sentiment remains fragile due to ongoing tariff tensions with trade partners.
• Investors are worried about worsening consumer sentiment and rising inflation expectations, with the 10-year Treasury yield climbing.
• The economic environment for the Federal Reserve is becoming increasingly complex, with Fed Chair Jerome Powell's statements on economic and monetary policy being crucial for any sustained market rebound.Recent data showed a greater-than-expected slowdown in the February Consumer Price Index (CPI), aided by easing rents.

U.S. stocks surged after Congress passed a temporary spending bill, but market sentiment remains fragile due to ongoing tariff tensions with trade partners. Investors are worried about worsening consumer sentiment and rising inflation expectations, with the 10-year Treasury yield climbing. The economic environment for the Federal Reserve is becoming increasingly complex, with Fed Chair Jerome Powell’s statements on economic and monetary policy being crucial for any sustained market rebound.

Recent data showed a greater-than-expected slowdown in the February Consumer Price Index (CPI), aided by easing rents. However, Wall Street fears that if high-pressure trade policies continue, this improvement might be temporary, potentially driving up costs and affecting prices in the coming months. The University of Michigan’s March consumer sentiment index fell to 57.9 from 64.7 in February, reflecting growing pessimism among consumers.

Inflation expectations for the next year rose to 4.9%, the highest since November 2022. Despite a slight decrease in jobless claims, the labor market hasn’t signaled significant distress, with continuing claims dropping to 1.87 million. Analysts remain cautious about potential layoffs among federal workers.

Yields on mid- to long-term U.S. Treasury bonds have fluctuated, with the two-year yield rising to 4.015%. The probability of the Fed maintaining rates in March exceeds 90%, with June being a potential window for rate cuts. Danske Bank suggests the Fed might signal a reduction or end to quantitative tightening (QT) in upcoming meetings. Barclays predicts two rate cuts by the end of the year, up from one previously.

Last week, U.S. stocks experienced volatility, with the Dow Jones falling over 3%, marking its worst performance in nearly two years. The S&P 500 entered a correction, losing about $5.3 trillion in market value within three weeks. Most sectors declined, with consumer staples and communication services falling over 3.5%. Among tech giants, only Apple and Nvidia saw gains.

Despite recent economic fluctuations, several institutions, including Goldman Sachs, have downgraded U.S. stock ratings. Retail and airline sectors have issued cautious guidance due to economic concerns. While funds continued to flow into U.S. large-cap stocks, the pace has slowed.

UBS advises investors to diversify portfolios with quality bonds, gold, and alternative investments. Schwab notes that last week’s rebound was largely technical, as government shutdowns were avoided. Upcoming retail sales reports, Fed meetings, and Nvidia’s GTC event could influence market movements. If Powell adopts a dovish tone, it could further support a market rebound.

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