Stocks End Lower Amid Concerns Over Inflation And Interest Rates  Image: Bigstock Stocks closed sharply lower yesterday with all of the major indexes down by -2% or more. (The Nasdaq and small-cap Russell 2000 were down the most shedding -2.50% and -2.99% respectively.) Last week's CPI and PPI reports showed inflation continuing to moderate, but at a slower than expected pace. And that slower pace has amplified the debate over how high the Fed will ultimately raise rates. Going into last week, in spite of the Fed forecasting the terminal rate at 5.1%, Fed Funds traders have been betting that the Fed calls it quits at the 4.75%-5.00% range (midpoint of 4.88%). With the midpoint currently at 4.63%, that would mean only one more 25 basis point hike to get to 4.88%, and two more 25 bps hikes to get to the 5.1% level. But last week's numbers may have changed expectations in the market.
Last week, for example, following the two hot inflation reports, Goldman Sachs increased their terminal rate forecast to a range of 5.25%-5.50% (midpoint of 5.38%), which would mean three more 25 bps hikes (1 in March, 1 in May, and 1 in June). We'll get another look at inflation on Friday, 2/24, with the Personal Consumption Expenditures (PCI) index, which is the Fed's preferred inflation gauge.
But it will then be 3½ more weeks before the Fed's next FOMC Announcement on rates on March 22. Yesterday's sell-off was only made worse when Michael Wilson, the chief U.S. equity strategist at Morgan Stanley, wrote in an analyst note that the market has entered a level known as the 'death zone,' believing that stocks have risen too high and have a ways to come down. We've heard spooky forecasts before. And plenty turn out to be dead wrong. Nonetheless, statements like those can cause the skittish to dump shares, as likely happened yesterday. In other news, yesterday's PMI Composite report came in at 50.2, with the Manufacturing Index at 47.8 vs. the consensus for 47.3, and the Services Index at 50.5 vs. the consensus for 47.2. And Existing Home Sales slipped to 4.000 million units (annualized) vs. last month's upwardly revised 4.030M and views for 4.100M. On a y/y basis, sales are down -36.9%. Today we'll get MBA Mortgage Applications, the State Street Investor Confidence Index, and the FOMC Minutes from the Fed's last meeting earlier this month. Should be a busy day. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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