U.S. equities continued to push to new highs last week as enthusiasm around artificial intelligence sustained a surge in tech stocks. Falling Treasury yields also provided a lift as cooling inflation data, disappointing manufacturing activity, and a drop in consumer sentiment bolstered expectations for the Fed to begin rate cuts this summer. For the week, the tech-heavy Nasdaq led the way with a 1.8% gain, while the S&P 500 rose 1.0% and the Dow Jones was flat. The S&P 500 has only logged two down weeks since the end of October with the support of growing soft landing optimism, stronger than expected fourth quarter corporate earnings, and the AI narrative tailwind.

Last week’s manufacturing report from the Institute of Supply Management (ISM) suggests that U.S. factory activity is struggling to rebound from a contraction that has now dragged on for over 18 months. The ISM Manufacturing index unexpectedly fell to 47.9 in February from 49.1 in January (any reading below 50 indicates contraction while a reading above 50 is expansionary). The manufacturing sector has been weighed down by relatively tepid goods demand, which in turn has led to declining goods prices that has helped inflation fall faster than expected. However, the larger U.S. service sector remains in expansion territory with support from strong consumer demand for services.

Despite sticky service inflation, the Fed’s preferred inflation gauge—the PCE index (Personal Consumption Expenditures)—continued to make progress toward the central bank’s 2% target in January. Core PCE (excluding food & energy) grew 2.8% compared to a year ago, which was down from the year-end annual growth rate of 2.9%. Goods prices declined 0.5% year-over-year while service prices were up 3.9% year-over-year. That service component remains an area of scrutiny for the Fed, but service inflation has consistently trended down since the start of 2023.

Following an agreement among U.S. lawmakers on another stopgap funding bill to avert a government shutdown, Fitch Ratings affirmed the United States’ long-term foreign-currency issuer default rating at AA+ with a stable outlook. AA+ is Fitch's second highest credit rating. The U.S. lost the top rating in August 2023, soon after Congress agreed on a bipartisan deal to suspend the country's debt limit until January 2025. The sovereign rating takes into account "the size of the economy, high per capita income, and a dynamic business environment," Fitch said in a statement on Friday. It also reflects the benefits the U.S. has from issuing the world's reserve currency and from the associated financing flexibility.

The week ahead is an eventful one with several important updates on the labor market headlined by the February jobs report that is due out on Friday. Economists have forecast that employers added 200,000 jobs last month, down from the eye popping 353,000 jobs gain in January. The presidential election will also be in headlines this week as voters head to the polls for Super Tuesday primary elections and President Biden gives his State of the Union speech on Thursday.