Stock and Bond Markets Lag on Inflation and Fed’s Hawkishness

Despite a strong start to the week, the Dow (-0.2%), NASDAQ (-3.8%), and S&P 500 (-1.2%) each ended the week in negative territory.  Taxable and tax free municipal bonds also fell over 1% for the week.  Both stocks and bonds are responding adversely to the same news relating to inflation and the Fed’s “hawkish” (less accommodative) stance toward raising interest rates.  In addition to expecting to raise interest rates several times this year, including an anticipated 0.5% in May, the Fed is also looking to decrease it balance sheet.  By doing the latter, they are effectively selling bonds, thereby creating selling pressure, lowering their value, and subsequently causing a rise in interest rates organically.  By raising interest rates, the Fed attempts to combat inflation. 

Two important measures of March inflation data are expected to come out later this week, and that is expected to have an impact on the stock and bond markets.  This week also marks the first week of corporate earnings season, and economists are estimating a 4.4% increase over last year.  Other economic data was mixed last week, as China and Europe reported poor data, as each region is currently struggling for their own reasons.  Meanwhile, the US reported strong non-manufacturing data that exceeded expectations.  And of course, the war in Ukraine continues to roll on and take thousands of lives, but so long as the war doesn’t escalate and pull the US in, the economic impacts to the US should not be drastic.

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