Economic and Market Overview
February 2026
Geopolitical tensions and fears of AI’s disruptive impact on corporate earnings and the broader economy weighed on equities and credit, sparking a flight-to-quality bid in Treasuries.
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The S&P 500 erased much of January’s gain, declining 0.8% over the month, as AI dominated headlines with a generally bearish tone. Large caps bore the brunt, while the Russell 2000 managed another monthly gain. Credit spreads widened as the prevailing risk-off backdrop combined with additional headwinds from the primary market. With respect to supply, J.P. Morgan reported $193 billion in total investment-grade issuance, 31% over the average February since 2022. High yield issuance remained elevated as well, with over $30 billion for the month, more than tripling the February 2025 total. Treasuries rallied, led by the long end, as a flight-to-quality bid emerged. By month-end, the 10-year yield had settled below 4%. With reports of increasing demand and the ebb and flow of U.S.-Iran tensions, oil twice recovered from brief selloffs en route to its second straight monthly gain. The Dollar Index finished higher, ending a three-month losing streak, even as gold also gained.
Economic Data
The cadence for data releases remained interesting as some continued to play catch-up from the Q4 government shutdown, and the BLS was shut down for five days in February. The Employment Situation Report was ultimately released on Wednesday, February 11, but was worth the wait for those hoping the labor market would find its footing. Nonfarm payrolls rose at a 130k pace in January, doubling consensus, and the release only included a 17k net reduction in the prior two months. The 4.3% unemployment rate beat expectations by 0.1% even as the participation rate ticked up by the same amount to 62.5%. Retail sales were weaker than expected in December, as the 0.0% MoM rate fell 0.4% short of surveys, though both consumer sentiment indices showed Americans were more confident than expected. Of note, the Conference Board also revised its January index up 4.5, so it was no longer the lowest reading since 2014. In manufacturing, hard data were mixed, but sentiment surveys were weak on balance. For the second straight month, housing releases came in fast and furious, but the results remained mixed. Economic growth disappointed in Q4, as the advance GDP release reported just a 1.4% annualized growth rate, or half the pace anticipated. Consumers weren’t responsible for the shortfall, however, as personal consumption at 2.4% landed on the screws. Rather, the government shutdown led to a drag on government spending, which should produce a tailwind for Q1. Economists currently predict a rebound to around 3.0%.
Inflation
Headline CPI rose at a 0.2% MoM pace in January, and the core figure rose by 0.3%. Both came in slightly below consensus and reflected the ongoing disinflationary trend in core services and housing. NISA expects core goods inflation to remain elevated in the near term before stabilizing later in the year. If so, core CPI would slow towards a 2% annual pace. PCE releases remain a bit behind schedule, but December data were announced on February 20 and came in approximately 0.1% over surveys across the board. Inflation expectations finished broadly lower, with longer breakevens down 5-10 bps.
Federal Reserve
The Federal Reserve did not meet in February. Commentary from FOMC officials suggests a majority of the Committee is comfortable leaving the policy rate unchanged for an extended period. Our modal expectation remains that the Fed will lower the policy rate twice this year, in September and December. The risk is skewed toward an earlier cut if disinflation proceeds more rapidly than we expect, but we think a cut is unlikely before the June FOMC meeting. President Trump announced that he has selected Kevin Warsh as his nominee to succeed Powell as Fed Chairman. Warsh is a conventional choice relative to many of the candidates Trump has considered in the past. We expect Warsh will continue to lean dovish in his first year on the job but gradually return to his hawkish roots on both interest rate and balance sheet policy. Read our full write-up here.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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