Stocks declined for a second consecutive day on Wednesday, reversing last week’s gains, amid mixed earnings reports and increased uncertainty over the monetary policy outlook.
Data released by the Census Bureau showed that retail sales rose more than was expected last month, registering their fastest increase in three months. The report provided another sign that consumer spending, which makes up about 70% of GDP, remains robust, confirming the Federal Reserve’s Beige Book conclusion that consumer spending spurred the economy in recent weeks.
The fresh data cast further doubts on the expectations of a Federal Reserve’s rate cut in March, adding weight to the remarks of the Fed’s Governor Christopher Waller, who said on Tuesday that the policymakers are in no rush to lower policy rates. Treasury yields rose, further weighing on stock prices, with all the S&P 500 (SPX) index sectors declining.
The markets are now pricing in about a 53% chance for a cut at the March 20 meeting, down from over 70% a week ago. According to strategists from Wall Street’s largest financial institutions, there’s still a large gap between investors’ rate-cut anticipations and the Fed’s data-based monetary policy projections.
The economic reports published in recent weeks have confirmed that the economy remains on solid ground, offering no sign of a recession, which means that expectations of a swift reversal of the interest-rate path are unjustified. Depending on further incoming economic data, investors may need to reassess their rate outlook, as “higher-for-longer” rates may hinder prospects of an extension of last year’s stock market rally.
