Commentary:

Yields increased while stocks declined in response to a higher-than-expected US inflation print. In February, the US headline CPI inflation (Consumer Price Index) ticked up from 3.1% to 3.2%, while core declined from 3.9% to 3.8% (both figures above consensus forecasts). Meanwhile, monthly PPI inflation (Producer Price Index) came in at twice the expected rate (0.6% vs 0.3% forecast). Discouraging inflation data pushed the yields higher, with 2 and 10-year treasury yields each rising by more than 20bps. Meanwhile, equity markets saw moderate losses, with large caps outperforming small and medium sized stocks. As a result, Morningstar analysts are now expecting an 11% upside in Russell 2000 (US small-cap benchmark index). It must be noted, however, that the small-cap stocks tend to be very sensitive to monetary policy decisions, and therefore, can be volatile during inflationary periods.

With increasing inflation concerns, markets are now pricing in a slower pace of Fed rate cuts in 2024. At the start of the year, markets were expecting a fast cutting cycle from the Fed, pricing in as much as 5-6 25bps cuts. However, as inflation proved stickier than expected, only 2-3 cuts are currently expected for 2024. Moreover, markets forecast no rate cuts until the June meeting, where only a 25bps cut is expected.