This will be a quick post, as I am finishing up a Commonwealth conference. As usual, it has been a wonderful chance to see old friends, make new ones, and have a great time in a beautiful place. It was as I expected, given the great people—and even better meeting planners—who make Commonwealth so special. In this case, at least, my expectations were well-founded and have been fully met. But today I want to talk about expectations in a more general way.

One of the major current risks to the market is the Fed’s tightening of policy. Much has been written about the Fed’s plans to raise rates, to start downsizing its balance sheet, and so forth. But what has been missing so far is the fact that many of the changes have already been factored in by the market—and what the market seems to be expecting is not really in line with the headlines.

Three hot topics at once. Talk about efficiency! Beyond efficiency, though, I do think there is a fairly deep connection here—and one that is worth talking about right now.

There were a number of important economic data releases last week, with a focus on international trade, consumer prices, and consumer sentiment. The reports showed that continued high levels of inflationary pressure weighed on consumer sentiment to start February. This will be a very busy week of updates, with reports scheduled to cover producer inflation, retail sales, industrial production, new home construction, and the minutes from the most recent Fed meeting.

Yesterday, the market sell-off continued, reportedly driven by a higher-than-expected inflation report and a comment by St. Louis Fed President James Bullard that he wanted to hike rates even faster than the market had been expecting. For a market that was already nervous about inflation and rates, it was a one-two punch. The Fed is being forced to act, by inflation, and at least one Fed member is very willing to hike rates quickly in response.

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Market Risk Update. Thanks for the assist, Sam!

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, has helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam!

January was a terrible month. Worries about economic damage from the Omicron wave were combined with the Fed’s perceived decision to start raising interest rates based on inflation levels at a 40-year high. Stocks were knocked down around the world. Tech stocks got hit especially hard, but even fixed income was down. It really was a terrible month.

Last week’s important economic data releases included January’s business confidence and employment reports. The January jobs report was a highlight, as it showed the economy added significantly more jobs than expected throughout the end of 2021 and start of 2022. Among the updates to come this week, the focus will be on international trade, consumer prices, and consumer sentiment.

Wow. I have rarely been so wrong about an economic report—or so glad to be wrong. And it wasn’t just me. The range of expected values for today’s jobs report was roughly between -400,000 and +250,000. Everyone was very wrong as it came in at +467,000. This was a much, much larger-than-expected gain, and it clearly shows there is something going on that analysts are missing.