Equities markets started the year off strong, with the Russell 2000 outperforming its peers, by rising 9.75% in January. However, focus remains on the Fed, the pace of rate hikes, and how long their hawkish stance will need to continue as they navigate inflation and a potential recession. During February’s FOMC meeting, the Fed raised its benchmark interest rate by another 25 basis points. Many market participants believe the Fed is nearing the end of it rate hikes and may even reduce rates in the coming months to help heal the economy and move rates to their desired long-run levels. If inflation continues to fall and jobs data remains positive, we could see a sustained, lower volatility period fueled by improving economic data and lower rates.

Whether or not a recession was going to happen was a big topic in 2022. The first and second quarter GDP declined, however, the key components the National Bureau of Economic Research (NBER) evaluates show more resiliency. The US economy grew at a 2.9% annualized pace in the fourth quarter. While the economy slowed from the third quarter’s 3.2%, it beat economists’ expectations, which were for a 2.6% growth rate. Under the hood, consumer demand rose 2.1% though that was less than expected as the momentum behind the consumer weakened.

The NBER evaluates several components when assessing for a recession, such as nonfarm payrolls, employment survey, real personal income, and others. Employment continues to be the bright spot in high-level economic data, though the trend of a slow cooling continues. The employment survey popped in December, though this data tends to be noisier than nonfarm payrolls. Both retail sales and industrial production have had two consecutive months of notable down months. Real personal income has been resilient in the face of rising prices and economic cooling, with six months of consecutive gains.

A positive trend in inflation data has continued with both yearly headline and core prices slowing to 6.5% and 5.7% respectively. However, monthly core prices rose 0.3%, up from a 0.2% monthly increase in November, on the back of price increases among services. Those gains were partially offset by monthly goods disinflation, which continued for the third month in a row. Headline inflation has slowed each month since July, and core inflation has slowed each month since October.

While positive movements in equity markets reduced equity implied volatility, credit spreads remain elevated, indicating potential risk in corporate balance sheets. Markets continue to try to digest mixed economic news with persistent inflation, as well as trying to anticipate what the Fed may do for the rest of the year, which can lead to sudden shifts in anticipated market risks.