The Federal Reserve's future course for rate hikes remains uncertain as of Friday, with Fed funds futures assigning a mere 2% chance of a rate increase next month, and a 25% likelihood by the end of the year. Policymakers' support for a rate rise has been hesitant, largely due to consistent inflation data. The three-month and six-month annualized core personal consumption expenditures inflation — the Fed's key metric — are currently around 2.2% and 3%, respectively, closely aligning with the central bank’s 2% target. For an imminent inflation reacceleration to be confirmed, all upcoming inflation data must indicate significant negative trends. Specifically, at least one instance of a 0.4% month-on-month increase is needed to shift the six-month moving averages upward on core PCE.
On Thursday, comments from Federal Reserve Chair Jerome Powell instigated short-term market shifts but offered no new insights on inflation and potential recession, nor did they provide an explanation for the sudden surge in interest rates. This lack of clarity has led to increased market volatility. Amid escalating conflicts in Israel, the iShares 20+ Year Treasury Bond ETF (NASDAQ: NASDAQ:TLT) struggled to maintain its 2007 levels as bonds across all durations plummeted to multi-year lows. This drop in bond prices has eroded their safe-haven status and contributed to significant market instability. Over 900 stocks hit new yearly lows, with the Russell 2000 Index approaching a retest of bear market bottoms.
The sustainability of bonds and the impact of upcoming significant earnings releases remain the primary uncertainties in this volatile financial environment.
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