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UU.S. equities rallied sharply higher last week as market participants gauged the progress of ongoing ceasefire talks between Russia and Ukraine and commodity prices cooled off from their recent upward surge. Oversold conditions and quarter-end rebalancing also may have played a role as investors bought beaten down equities to bring allocations back to their targets. The S&P 500 posted a 6.2% gain on the week, its highest weekly gain since November 2020, while the Dow Jones and Nasdaq Composite notched returns of 5.5% and 8.2%, respectively. Meanwhile, interest rates have pushed higher following last week’s Federal Reserve meeting in which the central bank lifted short-term rates off zero with a 0.25% hike, as anticipated. However, more aggressive communication from the Fed on future tightening has put further upward pressure on market rates with the U.S. 10-year Treasury yield climbing past 2.30% in this week’s early trading.

While the Federal Reserve has only just embarked on the lift-off in interest rates, financial conditions have already tightened considerably more than one small rate hike would indicate. Fed Chairman Jerome Powell noted yesterday that the central bank should move “expeditiously” towards tightening and be prepared to hike by 0.50% at future meetings as needed. Following his comments and last week’s Fed meeting, the market has priced in expectations that the federal funds rate will reach 2.5% within one year, which is certainly an accelerated pace from where the year began when expectations were for short-term rates to reach only about 1.0% over the same time frame.

Such a swift move in market rates shows that communication of future potential rate hikes is in and of itself a policy tool, and the Fed is making full use of this tool right now with their hawkish commentary. So even though it may take several meetings for the federal funds rate to move materially higher off zero, the market has already done much of the work of pricing in future hikes and increasing borrowing costs, which should help cool overheating rate-sensitive sectors like housing. According to the Federal Housing Finance Agency, U.S. home prices grew 16.8% nationwide in 2021, an unsustainable rate of appreciation. So far this year, the average 30-year fixed mortgage rates have pushed to over 4.5% from 3.27% at year-end.

The potential for the Federal Reserve to actually hike rates as aggressively as the market anticipates now will come down to the path of inflation and the economy’s ability to remain on stable footing during tightening. The U.S. economy has entered this tightening phase from a place of considerable strength with a strong job market and healthy corporate and consumer balance sheets. However, market participants will continue to monitor the fallout of wild card factors like the Russia-Ukraine conflict.

Last week, a series of news headlines noted positive traction in ceasefire negotiations between Russia and Ukraine that helped bolster investor sentiment and ignite the rebound in equities. Reports stated that the nations had come to closer together on terms—Including issues of NATO membership, demilitarization, and the protection of the Russian language—but both sides have since indicated that progress has been somewhat overstated. Little has changed in the situation on the ground at this point other than Russia widening the scope of its largely stalled assault to increase pressure on Ukraine. Developments in the conflict will likely continue to feed into market turbulence in the near-term.

In the week ahead, market participants will be watching the potential for the European Union to join the U.S. in an embargo of Russian energy products as President Biden is set to travel to Brussels to participate in the NATO summit. The potential for an E.U. ban will face much higher scrutiny given European dependence on Russian energy, though they may consider a phased approach for removing Russian oil & gas imports. In response, crude oil prices have pushed back over $110 per barrel after falling over the past two weeks, though they are still down about 15% from their highs.