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Financial Market Update – Week of 03/18

March 18, 2024

Major U.S. equity indexes traded lower last week as investors interpreted hotter-than-expected wholesale and consumer pricing inflation data. 

Markets mostly consolidated after the hot data, however, looking ahead to the Federal Reserve (Fed) meeting this week. Here’s a quick update to keep you up to speed heading into this key meeting. 

Overall Index Performance

Last week, the S&P 500 declined marginally again by 0.13%, the Nasdaq 100 fell by 1.17%, and the Dow Jones Industrial Average was close to unchanged, with a decrease of 0.02%.

Hot February Inflation Data

Consumer Price Index (CPI): Even though the headlines have been preaching the end of inflation, we have remained cautious about that narrative, as it is doubtful that inflation will decline linearly. 

February CPI came in mostly hotter than expected last Tuesday, showing a 0.4% monthly increase in December and a 3.2% increase versus one year ago. Dow Jones estimates were for gains of 0.4% monthly in December and a 3.1% gain year-over-year.

The verdict? Headline CPI = warm.

Core CPI (excludes food and energy) rose 0.4% on the month and was higher by 3.8% on the year, with both data points a tick higher than expectations.

Core CPI = warmer than headline CPI.

Energy prices significantly contributed to the hotter monthly inflation print. Transportation prices also saw rises.

Market reaction to the data release was mostly muted, as the market was “clearly braced” for the CPI report coming in hotter than expected.

Sizzling PPI

After the warm CPI print on Tuesday, Thursday gave us a Producer Price Index (PPI) reading that was quite hot and significantly above expectations.

The report showed wholesale prices rising by 0.6% in February month-over-month, double the Dow Jones economist estimate for a gain of 0.3%. That’s hot. The headline number saw its largest year-over-year increase since September 2023, rising by 1.6%.

Core PPI, excluding food and energy, increased by 0.3% for the month, compared to the estimated 0.2% rise.

The PPI data release was received with a bit more concern than its CPI counterpart, as the major stock market averages closed slightly lower on Thursday with moderate follow-through selling on Friday. The S&P 500 ended the week marginally lower by 0.13%.

Federal Reserve’s Dilemma

This week, we will hear what Federal Reserve Chair Jerome Powell has to say about the warmer-than-expected inflation prints for February.

As of Friday’s market close, probabilities for 2024 Fed rate cuts via Bloomberg’s overnight index swaps data indicated a total of 2.93 (so 2 or 3) quarter-point cuts by December. Many analysts expect the first cut to occur by the “end of the second quarter”.

The Fed is in a proverbial pickle. We don’t need government data to know that inflation is still running hot. How could the Fed cut rates with high prices still hurting the pocketbooks of so many middle-class Americans? 

Markets expected an “irrationally exuberant” six cuts in 2024 just a few months ago. It is a bifurcation of Wall Street’s desires and Main Street’s needs.

Treasury Yields Rise

If rate cuts are on the table in the near future, you wouldn’t know it by looking at the 10-year note yield, which rose by 21.5 basis points last week to close near 4.303%.

Hotter inflation prints translated to higher treasury yields last week, with the short end of the curve also gaining ground in yield, as 2-year note yields added close to 25 basis points to close the week near 4.730%.

2/10 Treasury Yield Inversion

Perhaps continuously overlooked, the 2/10 yield curve remains inverted. What about when it reverts or “uninverts”? The reversion of the curve has its own historical data and implications.

The 2/10 Treasury yield curve has been inverted since July 2022 or approximately 20 months. The duration and depth of the 2/10 curve inversion are truly remarkable. 

The Consumer

Many economic data releases over the past year suggest a consumer with seemingly unlimited money, which has been a long-standing theme.

Last week, the consumer was painted with a different brush, with softer-than-expected data in retail sales and weaker-than-expected consumer sentiment data.

Retail sales rebounded from January’s levels and grew by 0.6% in February, but they were below expectations. The University of Michigan’s Consumer Sentiment survey also fell short of expectations.

Let’s remember that retail sales data is not inflation-adjusted, and when accounting for inflation, the data looks much different.

Has the consumer finally reached the breaking point? Logically, they probably did a while ago.

The Takeaway

Equity market indexes have been rather quiet or tired in the last couple of weeks, with potentially a new catalyst needed to stimulate buyers at these levels.

Inflation is real, even though the equity market indexes have been discounting or even ignoring the recent warm metrics amid rate-cut hopes. Could that “hope” narrative shift even further soon? Let’s see what the Fed has to say this week.

A more cautious consumer could be the future narrative amid higher prices lasting for an extended period. 

Main Street USA has been seriously impacted by inflation for an extended period, and it only makes sense that analysts will begin to pay more attention to consumer strength via consumer confidence, retail sales, and other indicators of consumer strength or weakness going forward.


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