A U.S. inflation report next week could help determine if the market has correctly predicted the near-term path for interest rates. Investors believe the Federal Reserve will cut rates in the second half to prevent an economic downturn. This has pushed bond yields lower, supporting tech and growth stocks. The S&P 500 has gained 6.9% so far in 2023. However, the central bank’s more restrictive rate outlook sees borrowing costs staying around current levels through 2023. This view could be supported if next week’s inflation reading shows a strong rise in consumer prices even after aggressive Fed rate hikes over the past year. Recession worries are increasing, with investors betting that the recent banking crisis will tighten credit conditions and hurt growth. In the bond market, the Fed’s preferred recession indicator has dropped to new lows in the past week, supporting the case for those who believe the central bank will soon need to cut rates.
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