On cue, money markets swiftly repriced the terminal Fed Funds rate to 5.2% from 4.9%. Investors now face a new reality in which the US economy could be stuck in transit, leaving the Fed hawkish for longer. Europe, meanwhile, is on a better track, though inflation and higher rates remain challenges.
Just weeks ago, the surge in inflation looked set to fade, the worst of Europe’s energy crisis had been averted, and the US labour market had started to cool. That suggested central bankers could soon step back after delivering a furious set of rate hikes over the past year. Predictions of a deep global slowdown were also being revised away, spurred, in part, by China’s swift reopening.
But single data points can completely upend market narratives. Case in point: The punchy January US jobs report. That was followed by a surprise increase in retail sales and sticky CPI data, raising concerns that disinflation could prove more protracted than hoped.
