Wall Street's reaction to higher-than-expected inflation data suggested that the Federal Reserve still has a long way to go in its aggressive tightening crusade, making the odds of a soft landing appear slimmer.
Volatility has been increasing after a long period of subdued equity swings. Aside from all of the economic uncertainties, this reflects a market that has become more expensive following an exuberant rally from its October lows. Those gains have been eroding by the day, as fears of a potential recession have hampered the outlook for corporate America.
The S&P 500 fell further on Friday, deepening its weekly slump — the worst in 2023. The tech-heavy Nasdaq 100 fell nearly 2% as the two-year treasury yield hit 4.8%, the highest since 2007. the dollar climbed. Swaps now price in 25 basis point increases at the Fed's next three meetings, and bets on the peak rate have risen to around 5.4% by July. The benchmark is between 4.5% and 4.75%.
The unexpected acceleration in the measure of personal consumption expenditures highlighted the risks of persistently high inflation. Furthermore, resilient spending combined with the exceptional strength of the labour market may make it more difficult for the Fed to achieve its 2% inflation target. Separate data showed that consumer sentiment increased to its highest level in a year, while new home sales exceeded expectations.