In mid-February, the market was frightened by the possibility of a significant increase in inflation, which could lead to a sudden change in the Fed’s monetary policy. This fear was expressed in the increase in interest rates on US sovereign bonds, namely the 10-year one, which in just one month went from 1.3% to 1.73%, which caused an earthquake in the stock market, particularly in the technological sector, as the rise in fixed income detracts from the attractiveness of securities with richer valuations but also with greater growth potential in the medium-long term. The market was particularly sensitive to the upward fall of the 1.5% level in 10-year interest rates, given that the average dividend yield of the S&P500 was close to that value, that is, the risk stopped paying so much and it was natural that capital rotation had occurred, which precipitated a slight tumble on Wall Street, with the Nasdaq being hit hardest by selling pressure.
About four months later, interest rates on the same asset fell to 1.3%, and in the meantime what happened was a meeting of the FED where the central bank made it clear that its monetary policy would change, that is, to stop be ultra-dovish. Meanwhile, the latest employment and inflation data are starting to give reason to the idea espoused by Powell and his partners that inflation is temporary, such as the Institute for Supply Management’s index for the services sector, which revealed a drop in – 1.1% in the price paid, remaining however at a historically high level of 79.5, with an indicator above 50 showing an expansion. It remains to be seen whether the adjustment for a normalization of the increase in the cost of living will continue, as happened, for example, with the price of wood, however the scenario for inflation is now much less evident than it was just two months ago, which it may come to keep the FED without tampering with its purchase program for a few more months, not to mention the increase in interest rates, which could even stay for 2023 as previously projected.
