The Federal Reserve left its policy unchanged at last week’s meeting, despite revising sharply higher its expectation for both economic growth and headline consumer inflation this year. The Fed now anticipates Gross Domestic Product (GDP) growth of 6.5 percent this year, up from 4.2 percent in December. The headline Personal Consumption Expenditure (PCE) deflator is now expected to increase by 2.4 percent, compared to 1.8 percent in December, with core prices now expected to rise 2.2 percent versus 1.8 in December. Yet the projection for Fed funds remained unchanged at 0.0-0.25 percent through 2023. 

The Fed believes that the widely expected rise of inflationary pressures in the months ahead will be temporary. It expects both the core and headline measures of inflation to average 2.0 percent in 2022. That belief gives it the confidence to maintain its ultra-loose monetary policy until it sees “substantial further progress” toward its dual mandate of maximum employment and stable prices, which it anticipates “is likely to take some time.”

Such a reaffirmation of accommodation by the Fed would normally be a green light for equity markets, especially in combination with the massive $1.9 trillion American Rescue package. The bond market, however, says not so fast. Since the start of the year, the yield on the ten-year U.S. Treasury note has risen from 0.91 to 1.72 percent, including nine basis points last week, as the market adjusts to expectations of faster growth. There is also an element of concern that the Fed’s confidence regarding inflation may be misplaced, that the risk regarding inflation is skewed to the upside.  

After closing at a record high on Wednesday, the S&P 500 index drifted lower to end the week, as bond yields climbed. For the week, the index fell 0.8 percent, leaving it higher on the year by 4.2 percent. Energy stocks led the decliners as domestic crude oil fell $4.67 a barrel on what is believed to be a temporary slump in demand. Financials and tech stocks also fell. Healthcare and communication services rose slightly. The Nasdaq also fell 0.8 percent, while the small-cap Russell 2000 shed 2.8 percent. The DXY dollar index edged higher. 

How much further bond yields will rise, how quickly, and at what level will they present a real headwind for stocks? 

These are the questions that equity investors are asking themselves, while hoping for the yield adjustment to abate. With the economy expected to soon begin delivering sharply stronger results, it seems unlikely that the backup in yields has run its course, although that remains to seen. Pushing in the opposite direction for stocks are rising expectations for revenue and earnings growth. According to Factset, first quarter earnings are now expected to grow by 22.6 percent, up from 15.5 percent at the start of the year. Revenue is expected to grow by 6.2 percent, up from 3.8 at year-end. The full year forecast for earnings growth is now 24.9 percent, and 9.5 percent for revenue. 

The U.S. Federal Reserve wasn’t the only central bank making news last week. In Turkey, President Erdogan fired his central bank chief on Friday. Only just installed in November, the bank’s governor had raised interest rates in an effort to fight inflation. In response to the move, the Turkish currency has plunged 10 percent against the dollar. Elsewhere, Russia unexpectedly raised rates for the first time in two years on rising inflation concerns. Brazil also raised rates. And the Bank of Japan concluded a policy review by pledging to allow more fluctuation in the ten-year yield while transitioning to what it calls a “more sustainable” monetary framework. 

The coronavirus pandemic continues to cast a pall over the global economy, especially in the Eurozone.
According to the Bloomberg Vaccine Tracker, the EU has administered a first dose to just 8.7 percent of the population, and just 3.8 percent has been fully vaccinated. In contrast, the UK has administered a first dose to 44.4 percent of its population, and fully vaccinated 3.3 percent. In the U.S. those ratios are 24.5 and 13.3 percent. 

Consequently, Germany, France, and Italy remain in various stages of lockdown. And the EU’s temporary suspension of the AstraZeneca vaccine has slowed the effort further, while intensifying reluctance among those already hesitant to receive the shot. Some private forecasts of economic growth for this year have been revised lower as a result. Nevertheless, stocks in the Eurozone managed to edge fractionally higher last week. The EuroStoxx 50 index climbed 0.1 percent in euro terms, its third straight weekly increase. That gain fell to a modest loss in dollar terms, however. 

Lastly, the U.S. and China held their first in-person diplomatic meeting of the Biden administration last week, and by all accounts it was rather contentious, as both sides outlined their grievances with the other, ranging from human rights, to trade, to geopolitics. 

Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

Investments in small-cap companies involve risks, including volatility, that are greater than investments in larger, more established companies.

10The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.