The U.S. stock market is approaching a crucial turning point as uncertainty over inflation rises after hotter-than-expected economic data released in February. Despite mounting investor worries, the economy is showing signs of resilience that could protect it against a significant downside move.
The escalating risk-off sentiment in the market is also creating volatility for Bitcoin (BTC). The leading crypto asset, which has had a strong correlation with the U.S. stock market, moved opposite to the stock market in February, with a correction between BTC and the Nasdaq turning negative for the first time in two years. However, with the crypto bulls pausing at the $25,200 level, the risks of a downturn alongside stocks are increasing.
While there’s certainly a reason to maintain caution until the release of new economic data and the United States Federal Reserve meeting in March, some indicators suggest that the worst may be over in terms of the market making new lows.
Inflation remains sticky
The biggest worries of the current bear cycle, which began in 2022, have been decade-high inflation. In January, the Consumer Price Index (CPI) came in hotter than expected, with a 0.2% increase versus the previous month.
There are some additional signs that inflation may remain sticky. Inflation in the housing sector, which commands more than 40% of the weightage in the CPI calculation, has shown no sign of a downturn.
It appears that the market is slipping back into the 2022 trend where increasing inflation corresponds to higher Fed rate hikes and poor liquidity conditions. The market’s expectation of a 50-basis-point rate hike in the upcoming March 22 meeting has increased from single-digit percentages to 30%. Fed President Neel Kashkari also raised concerns that there is a lack of signs showing that Fed rate hikes are curbing inflation in the services sector.
However, a report from Charles Edwards, founder of Capriole Investments, argues that inflation has been in a downtrend with a minor setback in January, which is nonconclusive.
“Until we see this chart plateau out, or increase, inflationary risk is overstated and the market so far has overreacted.”
The release of the February CPI on March 12 will be instrumental in creating market bias in the short term.
Edwards says recession risk is lower than ever
Despite high inflation levels, the risk of a recession in the stock…
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