Last week the U.S. benchmark index had its biggest weekly percentage fall since December 2022 as economic data and comments from U.S. Federal Reserve officials heightened expectations the central bank will extend its aggressive monetary policy.

The latest figures for the Core PCE Price Index showed a 0.6% increase, surpassing expectations of 0.4%, and revealing that inflation remains a significant concern. Additionally, personal spending rose by 1.8%, exceeding the expected 1.4%, indicating that U.S. consumers remain persistent and could continue to cause inflationary pressures.

However, despite Wall Street’s recent narrative that the consumer is financially stable due to pandemic savings, most spending is still being done on credit cards. This, combined with the Federal Reserve’s tighter monetary policy, could negatively impact the economy.

It’s challenging to determine whether investors are paying more attention to the economy or the liquidity. During the last bull market, it appears that focus has shifted to the liquidity provided by the Fed. As such, the market is likely to remain volatile, and the downward pressure is likely to continue.

Investors must remain vigilant, recalibrate their inflation expectations and closely monitor the developments that could impact the stock market. The economy’s performance and the Federal Reserve’s monetary policy will play the most significant role in determining the equity’s market outlook.

Friday’s latest U.S. inflation surprise showed that rates unexpectedly rose again in February. Therefore, the narrative of steady disinflation has been ripped up and the bond markets are quickly re-pricing. This has triggered the Federal Reserve’s implied peak policy rates to climb by 50 basis points to 5.4% by September and any hopes of rate cuts by year end have evaporated.

The Fed tightening forecasts are inching up with the market now pricing in 30 basis points for March. The market still expects the Federal Reserve to hike by 25 basis points in May, while chances for another similar rate hike in June now stand at 72%.