Strong Economic Data Weaken the Case for Continued Stock Rally

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Lael Brainard is leaving the Fed to head the White House’s National Economic Council.

Jim Vondruska/Bloomberg

The dash for trash has hit a speed bump. Stocks faltered again this past week as the early-year rally, led by rebounds in 2022’s speculative-grade losers, ran into resistance from higher expected interest rates from the Federal Reserve in the wake of persistent inflation readings and few signs that growth is faltering.

Economists at an array of major Wall Street banks, including Goldman Sachs, Bank of America, and Citigroup, lifted their forecasts of the eventual peak in the central bank’s target range for the overnight federal-funds rate, to 5.25% to 5.50%, effectively bringing them in line with the fed-funds futures market. Deutsche Bank now is expecting a 5.6% single-point peak, up a half-percentage-point from its previous estimate, and among the highest forecasts.

According the CME Group’s FedWatch site, the futures market is pricing in three more quarter-point hikes, from the current 4.50% to 4.75%, at the Federal Open Market Committee’s March, May, and June meetings. The change in outlook was the addition of the last quarter-point move, with a 57.5% probability of a peak of at least 5.25% to 5.50% in June, as of Friday’s settlement. That’s up from under 41.8% a week ago and less than 4% a month earlier.

The shift in these odds reflects a recent string of economic data showing higher-than-forecast gains in employment and retail sales for January, along with less easing in inflation at the consumer and producer levels.

Two Fed district presidents, Loretta Mester of Cleveland and James Bullard of St. Louis, also opined this…


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