The Fed can still break markets. Here’s how

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Major US indexes notched their fifth consecutive winning week on Friday as strong corporate earnings and gains in Big Tech added to fervor on Wall Street.

Those gains came even as Federal Reserve officials attempted to reduce investors’ lofty expectations for a plethora of interest rate cuts this year.

Investors are still expecting four to five cuts in 2024, according to the CME FedWatch Tool, even though Fed officials have repeatedly said there will likely be three at most. That mismatch in expectations is beginning to concern some economists and traders.

What’s happening: Markets are soaring to new records – the S&P 500 broke through the 5,000-level threshold last week and the Nasdaq is on the verge of passing its previous best of 16,057. The US economy also seems to be chugging along: The unemployment rate remained at 3.7% in January, marking the 24th consecutive month that the nation’s jobless rate has been under 4%.

But that doesn’t mean the US has successfully avoided recession.

The difference between a soft landing – where inflation eases but the economy remains strong – and a recession is slim. The Federal Reserve is carefully weighing its next, crucial maneuvers as it attempts to land the plane. It is now signaling that interest rates could come this year but not until spring or summer.

There’s still more than a 50% chance that the Fed cuts faster than the market expects or even raises rates again, said Torsten Slok, chief economist at Apollo Global Management in a note to investors on Monday.

There are two signs pointing to unease amongst economists and investors.

Economists are getting worried: More than 20% of respondents said that the Federal Reserve’s monetary stance is “too restrictive” in a new survey by the National Association for Business Economics poll released on Monday, the highest percentage since mid-2010.

That means they think the Fed is keeping interest rates too high and could potentially slow down economic growth too much and risk a recession. The results of the survey came just before the central bank’s January policy meeting, where officials kept rates the same and Fed Chair Jerome Powell indicated that it was unlikely the bank would lower rates at its meeting in March.

On Friday, Atlanta Fed President Raphael Bostic told CNN that he doesn’t see rate cuts coming until this summer.

Investors show some doubt: Markets appear to be stable, or less volatile than before. But some indicators show that there’s underlying uncertainty and that Wall Street still fears a recession, said Slok.

Rates volatility (how much interest rates are expected to move up or down) and swaption volatility (how much the cost of betting on future interest rate changes is going up or down) are high relative to the VIX (which measures how much people expect the stock market to swing in the near future).

So even though the stock market seems relatively calm, there’s a lot of choppy water in the world of interest rates. Investors appear to be more unsure of the Fed’s next moves than in the stock market’s ups and downs.

And of course recessions aren’t particularly good for the stock market, either.

Coming up: This is a busy week with a lot of Fed speakers ahead. Tuesday morning also brings the January Consumer Price Index, a key measure of inflation. If CPI shows that price increases are higher than expected, we could see some of that uncertainty start to make an impact.

Super Bowl LVIII was the most-watched television broadcast in a generation, reports my colleague Olivier Darcy.

Sunday’s overtime thriller, which featured the Kansas City Chiefs facing off against the San Francisco 49ers, averaged 123.4 million viewers, CBS said Monday, breaking Super Bowl viewership records.

The highly anticipated showdown in Las Vegas surpassed the previous most-watched Super Bowl in history, a record set just last year when the Chiefs mounted a second half comeback to defeat the Philadelphia Eagles in front of 115 million viewers. The audience for Super Bowl LVIII was so large that it approached the all-time most watched television broadcast set in 1969, when an estimated 125 to 150 million viewers watched the Apollo 11 moon landing.

The record-breaking Super Bowl capped a strong season for the NFL, which had already blown past viewership records in the weeks leading up to its epic conclusion at Allegiant Stadium, with the NFC championship game on Fox averaging 56 million viewers and the AFC championship game averaging 55 million on CBS.

That makes the NFL and the Super Bowl all the more valuable to advertisers trying to reach a mass market. Companies dished out about $7 million to secure a 30-second spot during the big game.

Cocoa prices are surging so high that even the biggest chocolate makers are struggling to stay profitable, reports CNN’s John Towfighi. That doesn’t portend well for your wallet this Valentine’s Day.

Last Thursday, Hershey Co. said it would cut 5% of its workforce after historic cocoa prices and inflation-weary consumers dampened fourth quarter earnings.

Climate issues in West Africa – home to more than 60% of global cocoa production – are damaging crop yields, constraining cocoa supply and causing prices to soar.

Cocoa futures have skyrocketed, doubling in the past year and surging 40% since January; sugar, labor and other factors have also gotten pricier. That means higher prices down the line for consumers, who will shell out more to fill up on their chocolate treats.

“Cocoa is expected to limit earnings growth this year,” Hershey’s CEO Michele Buck said on a call with analysts Thursday. Hershey’s product prices rose 6.5% in the fourth quarter; prices for their confectionery chocolate and other candy products in North America rose 9% in 2023.

Other companies are feeling the pinch as well. Li-Lac Chocolates, which calls itself the oldest chocolate shop in Manhattan, told CNN that their raw chocolate prices are up 13% this February compared to a year ago.