Meanwhile, recent economic releases are consistent with further economic growth, receding inflationary pressures, and an improving global backdrop. We note the following concerning recent volatility drivers.

Chairman Powell has reiterated that the Fed remains data-dependent, and the latest economic releases remain consistent with falling, albeit slower than all would like, inflation. Interest rate markets are now assigning the highest probability to a 0.25% hike in short-term interest rates when the Fed meets later this month. All eyes will be on the upcoming February CPI inflation report.

Unfortunately, financial strains commonly emerge when the Fed raises interest rates, especially at a rapid pace. While current concerns stem from smaller bank’s bond portfolio losses, narrow funding sources, and exposure to commercial real estate, we note that systemically important large banks have diversified funding sources, broader business models, and higher levels of liquidity than smaller regional banks. The systemically important banks are also required to pass onerous business model stress tests designed to ensure they can withstand extremely severe economic and financial shocks. Consequently, we do not believe the current strains will morph into a systemic crisis.

Service Sector Remains Resilient

The February reading of the ISM Services PMI (a timely business survey) continued to indicate healthy expansion in services activity, after a brief contraction in December and a rebound in January. The ISM estimates that the current PMI corresponds to 1.8% economic growth, on an annualized basis. Combined with an improvement in the ISM Manufacturing PMI, although it’s still below the 50 expansion/contraction line, and the fact that services account for the major share of the economy, this suggests that private sector activity continued to expand in the first quarter.

Nearly all individual activity indexes were in expansion territory in February. New orders increased at the fastest clip since November 2021, indicating strengthening demand. Supplier delivery times shortened at the fastest pace since June 2009, indicating a significant improvement in vendor performance after the shortage-ridden and broken-supply-chains period during the pandemic. The services prices index fell, down in nine of the past 10 months, to its lowest level since January 2021. It indicates prices paid for materials and services continued to moderate, although pressures are still higher than pre-pandemic.

Labor Market Remains Strong

February job growth came in at an above consensus 311,000, indicating that payroll growth remains solid. The unemployment rate ticked up to 3.6% from 3.4%, but this was driven by a gain in the labor force as labor-force participation encouragingly increased, with prime-age participation back to its pre-Covid high. Importantly, wage growth looks to have peaked with average hourly earnings rising below consensus 0.2% month/month. This puts the six-month annualized run rate at 4.1%, close to its typical 3-4% pre-Covid range.

Global Economy Shows Further Signs of Improvement

The global economy continued to show signs of improvement in February, according to the latest PMI business surveys. The global composite PMI (combined service and manufacturing sectors) saw its third-straight increase and by the most since July 2020, to the highest level and first expansion level since mid-2022. Importantly, global new orders expanded for the first time in seven months, while the future output index climbed to its highest level in nearly a year.

Like the prior month’s data, China contributed greatly to the global figure as the end of its zero-Covid policy has seen growth surge. However, even outside of China, the expansion broadened across the globe, as the global composite PMI, excluding China, also rose to an eight-month high. Historically, improvements in the business surveys have been associated with rising global stock prices.