Markets Now Reflect Reality. Now Is The Time To Price In Rate Hikes.

Markets are finding it increasingly difficult to ignore recent data as it is becoming too overwhelming.

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In response to the blowout January jobs report, higher inflation figures than expected, and strong retail sales, the bond market priced in more rate hikes to come.

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Despite strong economic data, the stock market had shrugged it off.

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Stocks seem to be hitting home now that reality has set in. A 0.7% jump in producer prices and some hawkish comments from the Fed seems to have been the final straw.

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During the central bank's January meeting, Cleveland Fed President Loretta Mester said that she saw a compelling case for an increase of 50 basis points and that the Fed needs to do more to get inflation back to 2% as soon as possible. In a statement released on Tuesday, St. Louis Fed President James Bullard confirmed that he had sided with Mester in pushing for a larger increase last time around, and he did not rule out a 50-basis-points increase at the March meeting.

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The quarter-point hike was unanimous, and neither Mester nor Bullard are voting members, but it does indicate that more aggressive rate hikes are at least being discussed.

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There is no doubt that economic data have strengthened that case since the January meeting as well. One of the other changes for the March meeting will be the absence of Lael Brainard, one of the more dovish members of the Federal Reserve, and one of the most influential members, as she will be giving advice to President Biden during this meeting.

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It has been the belief that a Fed pause, or even pivot, isn't far off that has helped drive the market so far in 2023. The belief may now be slipping away, along with some gains made this year.