New York (CNN) There has been a sea change in the perspective of investors: bad news is no longer good news.
For a year, Wall Street has been hoping for fresh monthly economic data that would prompt the Federal Reserve to halt its aggressive pace of raising interest rates to keep inflation under control.
But at its March meeting – just days after a series of bank failures raised concerns about the stability of the economy – the central bank signaled that it planned to put rate hikes on hold in the current of the year. With an end to interest rate hikes in sight, investors stopped trying to guess the Fed’s next move and instead looked to the health of the economy.
It means that, while easing economic data was used to signal good news – that the Fed could potentially stop raising rates – now cooling economic prints simply suggest the economy is weakening. This has investors worried that the slowing economy could slide into a recession.
What happened last week? Markets tumbled after a slew of economic reports signaled the scorching labor market was finally cooling (more on that later), sending warning signals across Wall Street.
Investors therefore shed the high-growth, large-cap stocks that have surged recently to rush into defensive stocks in sectors like healthcare and consumer staples.
While tech stocks rallied somewhat at the end of the short trading week – markets were closed on Good Friday – the Nasdaq Composite slipped another 1.1%. The broad-based S&P 500 fell 0.1% and the blue-chip Dow Jones Industrial Average gained 0.6%.
What does this mean for the markets? Now that Wall Street is in “bad news is bad news and good news is good news” mode, it will look for signs that the economy remains resilient.
What hasn’t changed is that investors still want to see inflation data cool down. While the central bank has signaled it will suspend rate hikes this year, its actions so far have only somewhat stabilized prices. The personal consumer expenditure price index, the Fed’s preferred gauge of inflation, rose 5% for the 12 months to February, well above its inflation target of 2%.
Additionally, Wall Street may be overly optimistic about how the Fed will act going forward: some investors expect the central bank to cut rates multiple times this year, even though the central bank has indicated the month last that she had no intention of lower rates in 2023.
It’s unclear how markets will react if the Fed doesn’t cut rates this year. But there likely won’t be a noticeable recovery unless the central bank pivots or at least signals it plans to do so soon, said George Cipolloni, portfolio manager at Penn Mutual Asset Management.
Warmongering comments or revealing inflation fears could hurt markets, he adds. “It keeps that boiling point and temperature a bit high.”
What happens afterwards? The Fed is holding its next meeting in early May. Before that, he will have to analyze several economic reports to get an idea of how the economy is doing and what it will be able to handle. Markets currently expect the Fed to hike interest rates by a quarter point, according to FedWatch CME tool.
Is the labor market cooling?
The labor market appears to be cooling somewhat, at least according to the slew of data released last week. But it is still far too early to assume that the labor market has lost steam.
President Joe Biden said in a statement Friday that the March data is “a good jobs report for hard-working Americans.”
The March jobs report found U.S. employers added 236,000 jobs less than expected last month. Economists had expected a net gain of 239,000 jobs for the month, according to Refinitiv.
The unemployment rate fell to 3.5%, according to the Bureau of Labor Statistics. This is below expectations to hold steady at 3.6%.
The jobs report was also the first in 12 months to fall below expectations.
But this does not mean that the labor market is no longer solid.
“The labor market is showing signs of slowing, but remains very tight,” Bank of America researchers wrote in a note on Friday.
Yet other data released last week helps demonstrate that cracks are finally starting to form in the labor market. The February Job Openings and Labor Turnover Survey revealed last week that the number of available jobs in the United States had fallen to its lowest level since May 2021. The report of ADP on the private sector payroll was well below expectations.
This means for the Fed that the slowdown in the latest jobs report is unlikely to be enough for the central bank to suspend rates at its next meeting.
“The Fed will more than likely raise rates in May as the labor market continues to defy the cumulative effects of rate hikes that began more than a year ago,” said Quincy Krosby, chief global strategist at LPL Financial.
Monday: Wholesale inventories.
Tuesday: NFIB Small Business Optimism Index. Earnings from CarMax (KMX), Albertsons (ACI) and First Republic Bank (FRC).
Wednesday: Consumer Price Index and FOMC Meeting Minutes.
THURSDAY: OPEC monthly report and producer price index. Earnings from Delta Air Lines (DAL).
Friday: Retail Sales and Consumer Sentiment Survey from the University of Michigan. Earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Citigroup (C) and PNC Financial Services (PNC).