Sentiment in equity markets remained positive last week as fears of
financial contagion have continued to recede. Gains were led by big
technology companies – which were under severe selling pressure throughout
2022. The Nasdaq 100 index has gained more than 11% over the past two weeks
and is again in bull market territory, as it is 24% above its key October
2022 low.
The recent bank failures rattled financial markets and forced U.S.
authorities to bolster market liquidity with banks tapping record levels of
emergency liquidity from the central bank. This took some of the pressure
off the Federal Reserve on the inflation front at its last policy meeting
in March.
As the Fed’s emergency lending to banks stabilised, Fed officials are
likely to assess incoming economic data meeting to meeting before deciding
on a final 25-basis point hike.
On Friday the Commerce Department released its latest monthly update on
consumer prices measured by the PCE price index, which is the Federal
Reserve’s preferred gauge of inflation. The U.S. core monthly PCE rose by
0.3% in February, following a 0.5% increase in the previous month.
The core annual PCE rose by 4.6% in February, coming below expectations,
and slowing from 4.7% the prior month, marking the lowest reading in 15
months. While the decline and the downward trend in core PCE is welcomed,
the pace of decline is proving to be more stubborn and price growth remains
far too high for the Fed’s liking. Nonetheless, the slowing inflation
supports hopes that the Fed’s tightening cycle might be coming to an end
soon.
In March the Fed increased rates by 25-basis point with officials saying
that more tightening might be needed, explicitly saying that inflation is a
top priority while monitoring the risks from the banks collapses earlier in
the month.
Tech stocks have staged a good rally this year after a dismal 2022, mainly
on the prospect that the Federal Reserve may be close to ending its
interest-rate hikes. According the FedWatch tool, futures markets are still
broadly split on the chances of another 25-basis point increase in May.
The wave of instability across the financial sector in March, supported
investors’ bets that the Federal Reserve will halt its rate hikes soon. An
end to rate increases would be positive for tech stocks, as rising
borrowing costs tend to weigh on tech companies’ future earning potential
and valuations. Steady declines in the U.S. dollar and recent tech firms
cost cutting incentives, increase the tech stock appeal.
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