In the coming week, investor attention will be focused on several key data releases – the Case-Shiller Home Price Index January data to be published on Tuesday, the PCE February inflation report to be released on Wednesday, and the March non-farm payroll (“NFP”) report due – Friday. The former is a gauge of the health of the US residential real estate market, while the two latter are macroeconomic indicators that feed into the Federal Reserve’s monetary policy decision-making process, with a potential impact on financial markets.
Housing prices have been driven steadily higher in the past year by rising inflation – against which the asset class is seen as a natural hedge – and by a large pandemic savings glut. In addition, peripheral markets in the US have seen an even larger price spike as people move to the suburbs to take advantage of more flexible working arrangements. Any indication that prices have continued to grow despite geopolitical tensions and higher interest rates may be a powerful signal of the asset class’ resilience.
The February inflation and March NFP reports – in particular hourly wage growth – are likely to be drivers of Fed policy going forward. A higher than expected inflation number – or a robust increase in hourly wages – may instantly feed into market expectations of a more aggressive Fed. Projections of a faster tightening path will likely have a direct negative impact on public fixed income and may potentially put downward pressure on equity valuations, as both are negatively correlated to interest rates.
Geopolitics is also expected to remain front and center in investors’ minds, with news from the war in Ukraine and ceasefire negotiations poised to continue to fuel market volatility. This past week, hardening rhetoric on both sides, as well as more assertive statements by NATO, US and Europe’s policymakers appear to have reduced the likelihood for a negotiated settlement, at least in the short term.
All in all, higher interest rates and persistent geopolitical risk are expected to continue to affect equity market performance going forward amidst an energy shock, a sanctions and war-driven supply chain crisis, and a slowdown in global economic growth.
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