Week Ending March 18 Financial Markets Update

The S&P 500 Index completed its best performing week since November 2020, returning over 6% after two straight weeks of declines. Investors shrugged off the widely-anticipated rate hike after the Wednesday FOMC meeting as the war in Ukraine remains challenging but risk of global financial contagion appears minimal. A survey of FOMC members shows that the median prediction for the end of 2022 target rate has risen 100bps since the 12/15/2021 meeting. This week’s initial jobless claims of 214,000 show that United States maintains near full employment and inflation remains the larger problem for the Fed to tackle from its dual mandate. Many in the economic community believe that the U.S. economy has a strong enough foundation of fundamentals to withstand rising rates without spiraling into a recession.

The Fed raised rates last week by a quarter-percentage-point, as expected, for the first time since 2018 and signaled rate hikes at all six of its remaining meetings this year. Treasury yields, particularly those with shorter maturities, moved higher with the Fed being seen as more hawkish than expected. Inflation data released before the meeting showed the Producer Price Index increased 10% over the last year through February. Most of the increase came from an increase in energy prices. January’s increase was also revised up to 10%, which is the highest increase on record back to 2010. Retail sales grew 0.3% in February over the prior month, slowing from January’s strong increase of 4.9%. Nonetheless, retail sales are up 16% compared to last year, excluding gas stations, suggesting consumers are still on a strong footing.
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