March 2018 Market Commentary:
By Paul Hoffmeister, Chief Economist
In our view, one of the most important variables that impacted financial markets in February was growing concern about the Federal Reserve raising interest rates more aggressively than previously expected. Of course, there are almost countless variables that drive markets. It’s possible investor complacency heading into February and seemingly crowded, short volatility positions contributed to or intensified the stock market panic last month.
The S&P 500 peaked on January 26th and appeared to really begin its selloff on Friday, February 2nd when the US Bureau of Labor Statistics’ release of average hourly earnings showed surprisingly strong year-over-year growth of 2.9%, compared to the median expectation of 2.6% growth.
The strength in employee earnings growth is now at a post-financial crisis high and has sparked concerns of accelerating inflation down the road that may need to be addressed by stronger monetary tightening. The concern is predicated on the theory of wage push inflation, where end market prices of goods and services are preceded by increases in employment costs.
According to the Chicago Mercantile Exchange, futures markets estimated at the end of February a nearly 25% probability of a 2.25-2.50% federal funds rate target by December 19, which is the FOMC’s last meeting of the year. This would equate to four quarter point increases to the funds rate for 2018. At the end of January, the probability of a 2.25-2.50% funds rate target was approximately 21%; it was almost 9% at the beginning of the year.