The US stock market is approaching a critical turning point as inflation uncertainty mounts following better-than-expected February economic data. While investors are increasingly concerned, the economy is showing signs of resilience that may protect it from a downturn.
Risk off sentiment
The increasing risk-off sentiment in the market is also creating volatility for Bitcoin. The leading crypto asset, which has a strong correlation to the US stock market, moved against the stock market in February, with a correction between BTC and the Nasdaq turning negative for the first time in two years.
Market analyst Charles Edwards says that while there are good reasons to be cautious, investor risk aversion and expectations of a recession may be overblown.
Inflation continues
The biggest concern of the current bear cycle, which started in 2022, is decade-high inflation. In January, the consumer price index (CPI) came in better than expected, rising 0.2% from the previous month.
There are still some signs that inflation will continue. Inflation in the housing sector, which accounts for more than 40% of the weight in the CPI calculation, shows no sign of abating.
It appears that the market is moving back to the trend of 2022, with rising inflation accompanied by higher rate hikes by the Fed and deteriorating liquidity conditions. The market expectation of a rate hike of 50 basis points at the March 22 meeting has risen from a few percent to 30%.
Fed President Neel Kashkari has also expressed concern over the lack of evidence that the Fed’s rate hikes will curb inflation in the services sector. A report however, from Charles Edwards, founder of Capriole Investments, states that inflation is on a downward trend with a small setback in January, which is not convincing.
“Until we see this chart level out or increase, inflation risk is exaggerated and the market has overreacted so far.”
The release of the February CPI on March 12 will play an important role in creating a near-term market bias.