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Markets recover after rough February, but still far from year’s highs

News that the economy remains strong in the face of higher interest rates and a slowdown in housing helped investors regain some of the losses they saw after capping off the shortest month of the year on a sour note.

MANHATTAN (CN) — Just as inflation has proved to be sticky, with prices remaining high despite efforts to bring them down, the U.S. economy, too, has remained stubbornly robust, failing to kowtow to efforts to curb growth.

Data released this week show the economy remains strong heading into 2023 and resilient to high interest rates by the Federal Reserve. Most experts now believe the U.S. economy will continue to grow, if only for the first half of the year before hitting a wall.

“We do not think the economy is in as strong a position as the data prints indicate and continue to expect strong disinflation from the late second quarter onwards, with the Fed eventually cutting rates from December,” James Knightley, chief international economist at ING, said in an investor’s note.

He noted there are plenty of areas of concern — such as full-time employment flatlining since March 2022 and layoffs on the rise — and that businesses may have a “more defensive mindset” going into the latter half of the year.

As a result of the data, and the likelihood of the Fed continuing to raise rates, markets this week have flipped back and forth. By the week’s end, the Dow Jones Industrial Average gained 574 points, while the S&P 500 increased by 75 points, and the Nasdaq netted 295 points.   

Wall Street seemed primed for another mediocre week until Friday, when the headline index for ISM Services showed the economy again increased slightly last month. Analysts say this shows the still-growing economy is just now turning a corner.

“We expect the economy to maintain positive momentum in the coming months but suffer a mild recession in H2 2023,” wrote Oren Klachkin, lead economist at Oxford Economics. “Demand is holding up fairly well, and Fed rate hike haven’t significantly slowed growth, but we think these dynamics will change.”

Next week, Fed Chair Jerome Powell is scheduled to appear before Congress for his annual testimony, which should offer a greater window on the central bank’s plans for interest rates. The current federal funds rate is at 4.5% to 4.75%.

Peter Boockvar, chief investment officer at Bleakley Financial Group, noted that, besides the housing and auto sectors, the economy is still humming along. “The pushes and pulls are creating this uneven economic situation that definitely confuses me but still feels like we’re in this death-by-thousand-cuts environment in the coming year,” he wrote in an investor’s note.

Boockvar pointed to several comments in ISM report, one of which noted “the current dynamics in the marketplace are such that it is getting harder to reduce costs,” while another stated there has been a “slow decline in activity, but not a collapse like in 2009.”

Earlier in the week, the Conference Board’s index on consumer confidence showed another drop, down from 106 in January to just under 103 last month. The index on consumers’ short-term outlook for business and labor market conditions also fell again, down from 76 in January to 69.7 in February.

Ataman Ozyildirim, senior director for economics at the Conference Board, noted that consumers’ view of the present economic situation has ticked up slightly, but looking ahead the view is considerably more pessimistic. “Fewer consumers are planning to purchase homes or autos and they also appear to be scaling back plans to buy major appliances,” he said in statement.

On the plus side, the index showed consumers’ appraisal of the labor market improved slightly, with more than half of those surveyed saying jobs were plentiful, and 12-month inflation expectations also improved slightly last month.

“A report like this will be mixed for investors struggling to anticipate the future interest rate path,” said Jeffrey Roach, chief economist at LPL Financial. “Consumers indicate a slowdown in spending on big ticket items and travel-related services, but the slowdown in spending will not likely be enough for the Fed to pivot from their rate hiking plans for the next couple of meetings. Investors should expect a choppy market for the near-term.”

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