Markets were on the quiet side last week, as the Dow, Nasdaq 100, and S&P 500 all posted weekly gains amid the release of positive inflation data. Overall, the S&P 500 gained 0.79%, the Nasdaq 100 added 0.13%, and the Dow Jones Industrial Average increased by 1.20%.
Inflation Relaxation Continues
Inflation continues to decline on both the consumer and producer sides of the equation. This potential disinflation is a major driver of stock market bulls in the short term.
Producer Price Index (PPI)
On the wholesale pricing side of things, the Producer Price Index fell 0.5% in March from the previous month, below the 0.4% estimate by Dow Jones economists, and the biggest drop in 3 years.
On an annual basis, wholesale prices are up 2.7% versus February’s reading of 4.9%. This reading is the lowest annual wholesale inflation rate since January 2021.
The decline in wholesale inflation has market bulls wondering if the Fed’s job in raising interest rates is complete, but data shows there could be more tightening coming in May. More on that in a minute.
Consumer Price Index (CPI)
On the consumer side, March headline CPI data showed a 0.1% monthly rise and a 5% rise year-over-year, both below estimates. Core CPI, which removes food and energy, increased by 0.4% monthly and 5.6% annually, with both metrics in line with expectations.
It’s true that consumer inflation remains elevated. However, seeing the data come in lower than expectations on the consumer side – as well as a surprise drop in producer inflation – is encouraging.
Fed Meeting Minutes
Market bulls want to see clues that the Fed is ending rate hikes. Though inflation has been increasing at a lower rate, we must remember that the Fed does have a 2% yearly inflation target, which is still a ways away. Concerns over broader economic conditions remain elevated after the banking problems seen in March.
“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” said the March meeting summary, which was released last week.
The keyword here is “mild recession.”
Treasury Yields Rise
Interestingly, though U.S. stock indexes were quiet and mostly higher last week, Treasury yields rose. The 10-year note yield settled near 3.521% last week, a rise of over 7% from the previous weekly settlement near 3.287%.
2-year yields also rose last week, settling above 4% last week, even as inflation showed moderation. Retail sales data may have been a catalyst for higher yields last Friday, as the data shows that the consumer is weakening.
Retail Sales Slide
On that note, consumers pulled back on spending in March, with data showing a 1% decline for the month. This was a much larger decline than the 0.4% estimates by economists polled by Reuters, and it was a much larger drop than the 0.2% decline in February.
Consumers spent less on big-ticket items like cars, electronics, furniture, clothing, and at-home improvement projects such as garden equipment.
It only makes sense. Persistent high prices for goods and services for an extended period have caught up with the consumer, and credit card interest rates are hitting the highest level on record.
May Fed Meeting
Moderating inflation data has many expecting a pause by the Fed at the May Fed meeting. However, considering the way Treasuries traded last week, the Fed could continue with a hike of 25 basis points in May.
Consulting the CME FedWatch Tool at the close of last week, there was an 83.4% chance for a 25-basis-point hike at the May 3rd Fed Meeting and a 16.6% chance of no change in rates.
The CME FedWatch tool bases its data on Fed Funds futures. With such a high probability of a 25-basis-point hike in May, could the market sentiment be getting ahead of itself in anticipation of no hike?
It was a second consecutive week of quiet trade across major U.S. stock indexes, and the fourth week of gains out of the last five for the S&P 500. How to describe the current market sentiment? A tug-of-war sound about right.
Market bulls are looking for a less aggressive Fed nearing the end of its rate-tightening cycle and will cite lower inflation. Bears will point out the inverted yield curve, the Fed warning about a “mild recession,” and consumers affected by a long period of higher costs and using credit for necessities.
Who is right? Father Time, for one. While the short-term traders frustrate themselves trying to determine the short-term direction of the market, long-term investors simply continue to invest, resulting in average prices over time and exposure to all market cycles. Over time, the long-term investor with a disciplined approach has access to one of the best ways to build long-term wealth.
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