Rates: The Fed turns a blind eye (and everyone laughs)

Unsurprisingly, the Fed kept its key rates unchanged at 5.50%. The real question, however, was whether investors were right to anticipate six rate cuts this year, with the first move in March. The Fed's answer to this question was a resounding "no".

Jerome Powell made it clear that the Fed was thinking of cutting rates later this year, but not as early as March.

The release of the NFP (non-agricultural job creation) figures give some credence to this statement. In January, the US created 353k jobs, against an estimate of 185k. As for wages, they rose at an annual rate of 4.5% against an expected +4.1%, somewhat undermining the expected trajectory of inflation. All this has benefited the 10-year yield, which is holding up above 3.85%, with initial resistance still around 4.23/25%. Interestingly, in the space of two months, expectations of a rate cut at the next meeting of the Committee have completely reversed. They were 80/20 in December and are now 15/85.

Source: Bloomberg

The chart above also shows that Fed Funds yields are now almost 100 basis points above 2-year yields. Historically, this had tended to weigh on the S&P 500's performance in the months that followed. So, admittedly, last week's rise, helped by Amazon and Meta's results, doesn't support the theory. However, we must remain cautious, given the very high concentration of stocks that "make the market".