Market minute
Weekly analysis from the FS Investments Research team
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March 18, 2024
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Equities
The stock rally stalled as markets reacted to higher interest rates. Small and mid-cap stocks were hit particularly hard, with the Russell 2000 down -2.08%. While the S&P 500 slid
-0.13% on the week, it has gone a relatively long time without a meaningful drawdown and is still up 25% since it troughed in late October. Small cap performance has lagged the S&P 500 by about 650 bps so far this year.
Fixed income
Hotter than expected inflation data cooled hopes of a Fed rate cut in the near future and sent yields broadly higher. The 10-year rose 23 bps on the week to 4.31%, while the 2-year rose 25 bps to 4.72%. No rate cut is expected at the FOMC announcement on Wednesday of this week, but the new dot plot and fresh economic projections will be critical for markets which still expect three rate cuts in 2024. Markets are now split on June rate cut prospects. The Bloomberg Agg plunged -1.23%, while high yield fared better, down -0.24%, and leveraged loans eked out a gain.
Commodities
Crude prices rose nearly 4% last week, driven by reduced U.S. stockpiles combined with renewed geopolitical pressures as Ukrainian forces escalated their attacks on Russian oil refineries. Oil prices rose above $80/bbl to end the week at $81.04 for the first time in four months. Adding to the week’s bullish tone, the IEA increased its demand outlook for 2024 and noted that the market could fall into a supply deficit this year if OPEC+ member nations extend their production cuts as expected.
Economic overview
Inflation data delivered another upside surprise in February, further throwing cold water on Fed rate cut prospects. Consumer prices rose 0.4% m/m in February, and 0.4% when food and energy were excluded, versus the expected 0.3% gain. CPI edged up to 3.2% y/y in February and has stalled above 3% – it has averaged has averaged 3.3% since June of last year. Goods inflation is hovering around zero, but services inflation remains stubbornly high, and was 5.2% in February. Producer prices were also hotter than expected, as PPI final demand rose 0.6% m/m, double the 0.3% expected. Retail sales were softer than expected in February, and rose only 0.3% m/m when autos were excluded.
Source: Bureau of Labor Statistics, March 15, 2024.