US stocks fell in February as new inflation data indicated the Fed may need to raise rates higher and keep them elevated longer than the market anticipated. With almost all S&P companies reporting Q4 earnings, 69% of companies have reported EPS that beat estimates, but many have issued lower forward guidance. Economic news was mixed over the month. U.S. employers added 517,000 jobs in January, well above the 187,000 estimate. The unemployment rate fell to 3.4%, the lowest level in over five decades. Multiple inflation data points were lower in January but appeared to be falling at a slower pace indicating the Fed may need to raise rates higher than the markets expected. The producer-price index increased by 6% annually in January, down from 6.2% in December. CPI increased by 6.4% annually in January, down from 6.5% in December, but higher than expected. Core CPI, which excludes food and energy, climbed by 5.6% annually in January slightly below the 5.7% increase in December. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 5.4% annually in January, up from a 5% increase in December. US retail sales rose 3% in January, topping the 1.9% estimate. U.S. existing-home sales declined for an 12th consecutive month falling 0.7% in January.
Foreign stocks also declined in February as global recession fears reemerged. The Eurozone headline inflation rate continued to fall in January, increasing 8.5% annually, down from 9.2% in December. The European Central Bank raised its benchmark interest rate by 0.50% to 2.5% and signaled it would enact another 0.50% rate increase in March. The U.K.’s annual inflation rate fell to 10.1% annually in January, below economists’ expectations and down from 10.5% in December. The Bank of England raised it key rate by 0.50% to 4% in February and forecasted a much shallower recession than previously feared. Japan’s economy grew 0.2% in the fourth quarter compared to the third quarter and 0.6% on an annualized basis. Manufacturing activity in China rose at the fastest pace in over a decade in February. An early sign the country may be shaking off the impact of the pandemic sooner than expected. Oil prices declined in February, ending the month at $77.05, down from $78.87 per barrel in January. Emerging markets trailed developed markets in February, over the quarter to date, and over the last twelve months.
Interest rates jumped higher in February as bond markets repriced the anticipated path of remaining Fed rate increases. The yield on the 10-year Treasury sharply increased in February ending at 3.91%, up from 3.53% at the start of the month. The Federal Reserve increased the federal funds rate by 0.25% and signaled it was on track to do so again at its March meeting. Minutes from the February meeting showed that most officials thought a slower pace of rate increases provided the best way to manage the risks of raising them too much or too little while some officials said they would have supported raising rates by 0.50% given the strength of economic demand and inflation. The rate for a 30-year fixed-rate mortgage increased to 6.5% at the end of February up from 6.1% to end January. US Agency bonds were the top performer for February, while municipal bonds were the top performer for the year to date and last 12 months. Shorter-term bonds outpaced longer-term bonds for February, the year to date and the last twelve months.
|Index Performance||February||Year to Date||Trailing 12 Months|
|US Stocks (Russell 3000)||-2.34%||4.39%||-8.07%|
|Foreign Stocks (FTSE AW ex US)||-3.50%||4.11%||-6.72%|
|US Bond Mkt. (BBgBarc Int. Gov/Cred)||-1.80%||0.04%||-6.22%|
|Municipal Bonds (BBgBarc 1-10 Yr Muni)||-1.73%||0.11%||-2.06%|
|Cash (ICE BofA ML 3-Mo T-Bill)||0.33%||0.64%||2.10%|