Stocks drift as solid data renew fed speculation

U.S. stocks drifted after the biggest two-day rally since April 2020, as solid economic data rekindled speculation over the pace of the Federal Reserve’s pivot to more restrictive policy.

U.S. stocks drifted after the biggest two-day rally since April 2020, as solid economic data rekindled speculation over the pace of the Federal Reserve’s pivot to more restrictive policy. Treasury yields rose and the dollar was weaker. 

The S&P 500 was little changed after adding 4.4 per cent in two sessions that capped an otherwise bleak January for equities. Data on job openings and manufacturing showed a resilient economy that the Fed is trying to cool after inflation spiked to the highest in four decades. Central bank officials indicated they are laser-focused on fighting price gains but aware of the threat of stifling growth.

“It feels like we are starting February with an uneasy truce between buyers and sellers, following the brutal correction we had last month,” said Mike Bailey, director of research at FBB Capital Partners. “Looking ahead, my sense is investors see Jay Powell as having his foot a few inches away from the brakes. Will the market get a gentle tap? Or will the Fed slam on the brakes?”

Waves of volatility have swept across markets after Powell, chairman of the Fed, signaled swifter monetary-policy tightening than many expected. However, a few bank officials expressed caution over over faster-than-necessary tightening. 

San Francisco Fed chief Mary Daly cited a number of risks facing the economy in addition to the ongoing pandemic. Additionally, Kansas City Fed President Esther George said it’s in “no one’s interest to try to upset the economy with unexpected adjustments.”

The speakers still indicated “that tightening needs to be done, but there was a suggestion that it would be better to run down the balance sheet more quickly rather than hiking rates rapidly,” Fiona Cincotta, senior financial markets analyst at City Index, said by phone. “That’s pushing back on this idea of rapid increases in interest rates.”