Investors are folding their bets that the Fed will cut rates before year end after recent reports show the economy isn’t slowing enough to justify such a move. January’s employment report followed by January’s inflation report followed again by January’s retail sales report showing the largest consumer spending increase in two years shook the market’s confidence that the Fed will in 2023 (something I always saw as a long shot). Derivatives markets are now forecasting a peak Federal Funds rate of 5.25% in August and a year-end rate of 5.1% that are consistent with the message that Jay Powell and his colleagues have broadcast consistently (and the departure of Lael Brainerd, generally known as a dove, probably doesn’t help the cause of those looking for lower rates though any change in tenor at the central bank will naturally depend on her successor).

Markets traded well ahead of themselves this year by heavily discounting the effects of 500 basis points of interest rate hikes (the minimum we will see) and additional tightening from QT. Treasury yields should back now but equities are also vulnerable to rewinding some of the powerful gains they saw in January and early February.