Bullish Stocks Narrative Seen Intact After U.S. Inflation Data
The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, rose 0.3% from the prior month, slowing from January’s surprisingly strong reading.
(Bloomberg) -- A cooldown in the Federal Reserve’s preferred gauge of underlying inflation last month, coupled with a rebound in household spending, failed to shift the Wall Street consensus that has lifted stocks to records in the first quarter.
The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, rose 0.3% from the prior month, slowing from January’s surprisingly strong reading.
The data, released with markets closed for the Good Friday holiday, are in line with the view that while inflation has cooled, it remains stubbornly higher than the Federal Reserve would like, limiting the scope for interest rate cuts this year. At the same time, the numbers are reassuring strategists that the economy continues to hold up just fine after the Fed’s rate-hiking campaign of the past two years.
“Bottom line: I don’t see this doing anything to change either the Fed’s or the market’s narrative right now,” said Steve Sosnick, chief strategist at Interactive Brokers.
Swaps traders on Thursday slightly trimmed wagers that the Fed would cut rates as soon as June, reinforced by the latest Fedspeak. On Wednesday, Fed Governor Christopher Waller said there was no rush to lower interest rates and emphasized that recent economic data warrants delaying or reducing the number of cuts seen this year.
Fed Chair Jerome Powell said Friday’s data is what he was expecting, while acknowledging that the latest reading wasn’t as good as the ones last year.
“It’s good to see something coming in in line with expectations,” Powell said at an event at the San Francisco Fed after the data release. “February is lower but it’s not as low as most of the good readings we got in the second half of last year; but it’s definitely more along the lines of what we want to see.”
The data comes after a stellar quarter for stocks as investors pile on bets the Fed will be able to achieve a soft landing. Up 10% in the first three months, the benchmark S&P 500 has broken its record 22 times this year, boosting US equity values by $4 trillion. The rapid ascent has led some to worry about the market running too hot. On Friday, two-year yields, more sensitive than longer-maturity debt to Fed policy expectations, rose five basis points to 4.62%.
One concerning part of Friday’s report was the mismatch between spending and income, said Sosnick. While higher spending boosts the economy short-term, it’s unsustainable to spend more and make less. Real personal spending climbed 0.4% last month, above estimates for a 0.1% increase.
US equity and bond futures will open as usual at 6 p.m. New York time Sunday following the holiday.
Here’s what others on Wall Street are saying:
Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors:
Marvin Loh, senior macro strategist at State Street Global Markets:
Chris Low, chief economist at FHN Financial
Zachary Hill, head of portfolio management at Horizon Investments:
Jeffrey Roach, chief economist at LPL Financial:
Jay Hatfield, chief executive officer at Infrastructure Capital Advisors:
French CPI
--With assistance from Elena Popina and Rita Nazareth.
(Updates with Fed Chair Jerome Powell’s comment in sixth, seventh paragaphs.)
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