The major averages finished lower on Friday amid light volumes and quiet trading. There was no major headline catalysts, through a surprisingly weak report on factory activity in the Chicago area seemed to dampen the mood. The situation in Greece simmered again amid new anti-government protests in Athens.
In the end, the Dow Jones industrial average lost 0.5 percent to close at 18,132, while the S&P 500 lost 0.3 percent to close at 2,104. The Nasdaq Composite remains within striking distance of the 5,000 level.
Crude oil gained $1.26 a barrel to close at $49.76 after it was reported that the U.S. drilling rig count had fallen to its lowest level since June 2011, although the rate of the decline is slowing somewhat. Both oil production and crude inventories are at record highs.
Retail stocks were in focus following positive reactions to earnings from Gap (GPS) and Ross Stores (ROST), which gained 3.1 percent and 6.8 percent, respectively, in response. This lifted hopes that, after a disappointing performance recently, retail sales could soon get a lift.
Brushing off Thursday's deflationary read on consumer price inflation, Federal Reserve officials seemed to confirm that, indeed, a series of rate hikes are coming later this year. New York Fed President Bill Dudley warned that if bond yield remained very low the Fed may be more aggressive when it does start to tighten policy -- a nod to the recent drop in long-term Treasury yields. And Fed Vice Chair Stanley Fischer said there was a high probably that rates would rise this year.
For the week, the major averages finished mixed with large caps inching lower. Yet for the month the S&P 500 gained 5.5 percent, the index's best performance since October 2011. Heading into March, the focus now turns to the next Fed policy announcement on March 18.
In her semi-annual presentation to Congress this week, Fed Chair Janet Yellen indicated that policymakers could soon modify or remove the guidance that they would be "patient" in raising interest rates. But such an action wouldn't necessarily mean that a rate hike would take place over the next couple of meetings, as as had been widely expected.
Still, Paul Ashworth at Capital Economics expects the Fed to make a move in June, which would be the first interest rate increase in the U.S. since 2006. He believes Yellen laid the groundwork for such an action by dismissing the recent comedown in inflation while talking up the pace of job creation and the specter of wage gains. In Yellen's words, "considerable progress has been achieved in the recovery of the labor market."
The Fed remains slightly more optimistic about the pace and timing of rate hikes than the bond and futures market, as traders continue to watch U.S. economic data fall short of forecast. In fact, the rollover in the data marks the worst start to the year for the economy, relative to expectations, since 2009. Earnings expectations are also sliding.
The divergences -- between the Fed and the market on rates and between lofty stock prices and the rollover in the hard economic and earnings data -- should make for an exciting trading environment in the weeks to come.