Monday, 3/18/2024 p.m.
- Stocks kick off the week on a positive note: Stock markets closed higher on Monday, with the technology-heavy Nasdaq outperforming both the Dow Jones and S&P 500. Investors were optimistic around technology and artificial intelligence (AI) sectors to start the week. This comes as there is growing speculation that Apple may be in talks to partner with Google's Gemini platform to help build an AI engine into the iPhone*. Also, NVIDIA kicks off its annual GTC conference for AI developers on Monday evening, with a keynote address from CEO Jensen Huang, who will layout his vision for NVIDIA and AI. Meanwhile, Treasury yields continue to drift higher, with the 10-year Treasury yield now over 4.3%, well above its lows of the year of around 3.9%*. The move higher in yields in part reflects the markets' updated view that the Fed may only implement two to three rate cuts this year, fewer than the six cuts forecast at the start of the year.
- The Federal Reserve takes center stage on Wednesday: Market focus this week will shift to central-bank policy-rate decisions, with the FOMC scheduled to meet on Wednesday. Market expectations are for the Fed to hold rates steady at 5.25% - 5.50%*. The Fed will also deliver an updated set of economic projections and a new dot plot, which outlines the FOMC members' best guidance for the path of the fed funds rate over the next three years. Keep in mind that at the December Fed meeting, the dot plot indicated three rate cuts for 2024*, and investors will be watching carefully to see if the FOMC maintains this rate-cut outlook or perhaps shifts lower to just two rate cuts in 2024. In addition, investors will monitor whether the forecast for inflation remains intact and the Fed still expects core personal consumption expenditure (PCE) inflation to moderate to 2.4% annually this year*. Given that recent inflation readings have been modestly above expectations, there may be an adjustment higher to the inflation outlook for 2024. In our view, while the Fed may adjust 2024 figures, the overall direction of travel remains toward a rate-cutting cycle and gradually moderating inflation.
- The Bank of Japan holds critical policy meeting this week: The Bank of Japan (BoJ) is scheduled to announce its policy decision on Tuesday, and forecasts are calling for the central bank to implement its first rate hike since 2007. This would bring the policy rate from -0.1% to the 0% - 0.1% range*. Currently, the BoJ is the only central bank globally that employs negative rates, which supports the economy with monetary easing. However, given that Japan's large labor organizations have recently negotiated wage increases, the BoJ feels more comfortable that economic conditions are in place for maintaining 2.0% inflation. In our view, if the BoJ brings its policy rate from negative to positive, this would serve as an anchor for global rates and could pull U.S. government bond rates modestly higher. The anticipation of the BoJ move is perhaps another reason that U.S. Treasury yields have moved toward the highs of the year in recent weeks.
Mona Mahajan
Investment Strategist
*FactSet
- Stocks close mostly lower: Equity markets finished mostly lower Friday, with the S&P 500 shedding close to 0.7% and the technology heavy NASDAQ losing about 1%.* Small-cap stocks outperformed on the day, with the Russell 2000 Index gaining about 0.4%.* At a sector level, information technology, communication services, and consumer discretionary were laggards, each down by over 1%.* On the corporate front, shares of software company Adobe shed over 13% following the company's earnings results after market close yesterday. Adobe reported earnings and sales for the quarter that exceeded expectations but offered forward guidance that underwhelmed. Overseas, both Asian and European markets were mixed ahead of key central bank meetings from the Bank of Japan and Bank of England next week. Treasury yields ticked higher with the 10-year yield finishing just above 4.3% and the 2-year yield closing around 4.74%.*
- Monetary policy takes the spotlight next week: Market focus in the week ahead will shift to central bank policy rate decisions, with the FOMC scheduled to meet on Wednesday. Market expectations are for the Fed to hold rates steady at 5.25% - 5.50%.* Coming into the year, markets had priced in about six 0.25% rate cuts from the Fed in 2024, with the first cut expected to be delivered at the upcoming March meeting.** Back-to-back consumer price index (CPI) inflation readings that were hotter-than-expected have tempered market expectations for rate cuts, with futures markets now pricing in about three 0.25% Fed rate cuts in 2024 with the first cut expected at the June meeting.** Despite hotter-than-expected CPI readings in the past two months, the overall trend in inflation remains lower, and our view is that the Fed could still have a credible case to begin cutting rates by the June meeting. The Fed won't be the only central bank that garners attention next week. The Bank of Japan (BoJ) is scheduled to meet Monday, where there is a chance the BoJ could raise policy rates into positive territory after holding steady at -0.1% since 2016.* Japan's largest trade union indicated that workers could see year-over-year wage growth of over 5%.* If achieved this would be the largest pay increase since 1991.* Higher wage growth could give Japanese policy makers confidence that inflation can be sustainably maintained at 2% after the Japanese economy has dealt with deflationary pressures for the past three decades. Additionally, the Bank of England (BoE) will meet on Thursday, where expectations are for the BoE to hold policy rates steady at 5.25%.*
- Equity sector leadership has broadened over the past month: Sector leadership year-to-date has in many ways looked similar to 2023, with information technology and communication services the top performing sectors of the S&P 500. These sectors have been backed by strong earnings growth and enthusiasm around the potential of artificial intelligence (AI). The past month, however, has seen broadening of leadership with cyclical and value sectors outperforming the growth-oriented technology and communication services sectors. Over the past month, energy and materials are the top performing sectors, each higher by over 9%.*** Utilities and financials have seen strong performance over the past month as well, with both sectors higher by over 4%. This compares to a roughly 3% return from technology and 0.7% return from communication services.* Additionally, the Russell 1000 Value Index has risen by 4.2% compared to a 2% gain for the Russell 1000 Growth Index.* Looking ahead we believe broadening of leadership is a trend that could continue in 2024 with some of last year's laggards such as value-style investments and small- and mid-cap stocks potentially playing catch up.
Brock Weimer, CFA
Associate Analyst
*FactSet
**CME FedWatchTool
***FactSet, GICS Sectors of the S&P 500. Past month returns from 2/14/2024 – 3/14/2024.
- Stocks fall in after disappointing economic data - Equities finished lower and government bond yields rose after U.S. producer prices came in hotter-than-expected and retail sales rebounded but with less vigor than hoped. The energy sector was the best performing sector as it got a boost by a rise in oil prices. WTI rose above $80 for the first time in four-months*. Small-cap stocks declined more than 2%, reversing some of their recent relative gains. Ahead of the Fed meeting next week, the rise in yields is consistent with the view the policymakers will not be in a rush to cut rates as concerns around inflation linger.
- Producer prices rise faster than expected - Following Tuesday's upside CPI surprise, the headline producer price index (PPI) for February gained 0.6% month over month (vs. 0.3% prior) and 1.6% over the past year (vs. 0.9% prior) as energy prices rebounded. The core index, which excludes food and energy, advanced 0.3% from January (vs. 0.2% prior) and held steady at 2% from a year ago*. Taken together with consumer prices, today's data suggest that navigating the "last mile" of inflation towards 2% might be bumpy but doesn’t necessarily change the outlook for inflation to remain in a downward trajectory over the course of the year. The February inflation reports reinforce the Fed's patient approach in cutting rates, which we suspect will be highlighted in next week's FOMC meeting and fresh set of projections. However, we think that conditions will fall into place for the first rate cut to be delivered in June. The six rate cuts that were priced in by the markets at the start of the year have now been reduced to three, lining up with the December Fed's and our own projections*.
- Retail sales rebound but economy is gradually slowing - U.S. retail sales rebounded in February after the winter storms weighed on January's figures, which were revised lower, but the gains were smaller than expected. Retail sales gained 0.6% from the prior month helped by a rise in car sales and gas prices. Excluding autos and gas, sales rose 0.3% (vs. -0.8% prior) and control-group sales, which exclude cars, gas, food services, and building materials, stayed unchanged, suggesting that consumer spending started the year on a weaker note*. A strong labor market as highlighted by today's historically low number of jobless claims and income gains will likely continue to support growth and keep the economy out of recession. But growth will likely slow towards trend pace, which for the U.S. economy is about 1.5% - 2%. Gradually moderating inflation and steady growth can provide a healthy backdrop for the bull market in stocks to continue. However, after the strong rally over the past four months, we would expect potentially more choppy conditions ahead.
Angelo Kourkafas, CFA
Investment Strategist
*FactSet
- Stocks closed mixed ahead of new inflation data and retail sales: After rallying on Tuesday, stock markets closed mixed on Wednesday. The Dow Jones was modestly higher, while the technology-heavy Nasdaq moved lower. Markets are awaiting data on February U.S. producer price index (PPI) inflation as well as retail sales, both due out on Thursday morning. Meanwhile, Treasury bond yields continued to tick higher, with the 10-year Treasury yield up around 0.04% to about 4.19%*. Yields have moved higher from the lows in early January as inflation data has been stickier than forecast for the first two months of the year.
- February consumer price index (CPI) inflation came in above expectations: On Tuesday, markets digested CPI inflation data for the month of February, which came in slightly ahead of expectations for the second month in a row. U.S. headline CPI rose by 3.2% year-over-year in February, above last month's 3.1% reading and above consensus expectations for a 3.1% rise.* Core CPI, which excludes food and energy, rose by 3.8% year-over-year, down from the January reading of 3.9% but above consensus expectations for a 3.7% rise.* Looking underneath the surface, food prices and areas like motor vehicle insurance continue to climb; however energy prices have eased broadly as have used car prices, providing some relief for consumers. Notably, shelter and rent prices in the CPI basket remain elevated. However, in our view these should continue to moderate in the months ahead, as they tend to act with a lag to real-time housing and rental market data. Nonetheless, while we see inflation heading towards 2.5% this year, the path to get there may be bumpy, as we have seen over the first two months of the year.
- Focus turns to producer price index inflation and retail sales: On Thursday, markets will turn their focus to the PPI inflation data as well as retail sales. Expectations are for headline PPI to rise by 1.1% year-over-year, an uptick from the January reading of 0.9%.* PPI excluding food and energy is expected to rise by 1.9% year-over-year, below the January reading of 2%.* In addition to PPI inflation, investors will also get a read on consumer spending trends with the release of February retail sales data. Expectations are for retail sales to rebound after a slowdown in January. Headline retail sales are expected to rise by 0.7% month-over-month, after declining by 0.8% month-over-month in January.* On the inflation front, we believe the easing core PPI data underscores that input pricing to manufacturers of goods is likely moderating. And the retail sales data may continue to demonstrate a resilient U.S. consumer. However, in our view, consumption growth may cool after several quarters of above-trend growth rates, particularly as excess savings rates have moderated, and household debt levels have increased. Nonetheless, as we head to the back half of 2024, we believe the consumer backdrop should improve as inflation continues to gradually moderate, and the Fed embarks on a rate-cutting cycle.
Mona Mahajan
Investment Strategist
*FactSet
- Stocks finish higher despite hotter-than-expected inflation report: Equities closed higher on Tuesday despite a higher-than-expected consumer price index (CPI) inflation reading. Leadership favored growth sectors with information technology, communication services, and consumer discretionary among the top performing sectors of the S&P 500.* The technology sector received a boost from strong earnings results from software company Oracle, which reported after market close yesterday. Shares of Oracle surged by over 10% today after the company reported earnings that were ahead of expectations driven by strong growth within the companies cloud services segment.* Treasury yields finished higher with the 2-year yield rising about 0.06 percentage points to 4.59% while the 10-year yield also rose 0.06 percentage points to 4.15%.* We'd view the relatively modest move higher in yields, despite the hotter-than-expected inflation reading, as a sign that markets believe the Fed will still have a credible case to begin cutting rates around midyear. Overseas, European markets were also higher in response to a softer-than-expected U.K. employment report which could support the case for interest rate cuts from the Bank of England later this year.
- February CPI hotter-than-expected: U.S. headline CPI rose by 3.2% year-over-year in February, above last months 3.1% reading and above consensus expectations for a 3.1% rise.* On a month-over-month basis, headline CPI rose by 0.4%, in line with consensus expectations. Core CPI, which excludes food and energy, rose by 3.8% year-over-year, down from the January reading of 3.9% but above consensus expectations for a 3.7% rise.* On a month-over-month basis, core CPI rose by 0.4%, above expectations for a 0.3% gain.* Today's reading marks the second consecutive month of hotter-than-expected CPI inflation, which could create some uncertainty around the timing of interest rate cuts from the Fed. However, market expectations are still assigning a roughly 70% probability of the Fed delivering its first rate cut at the June meeting, about the same probability as this time last week.*** Despite today's hotter-than-expected reading, we would align with market expectations for the first Fed rate cut to come at the June meeting. The Fed's preferred measure of inflation, core personal consumption expenditures (PCE) is more closely approaching the Fed's 2% inflation target, rising by 2.8% year-over-year in January.* Additionally, we believe that inflation will trend lower over the coming months, driven by lower shelter costs and moderating wages, although as we've seen in the past two months, the path to 2% could be bumpy.
- Focus turns to retail sales and producer price index inflation: Inflation data will remain front and center for markets this week with Thursday's release of producer price index (PPI) inflation for February. Expectations are for headline PPI to rise by 1.1% year-over-year, an uptick from the January reading of 0.9%.* PPI excluding food and energy is expected to rise by 1.9% year-over-year, below the January reading of 2%.* In addition to PPI inflation, Thursday will also provide a read on consumer spending trends with the release of February retail sales data. Expectations are for retail sales to rebound after a slowdown in January. Headline retail sales are expected to rise by 0.7% month-over-month, after declining by 0.8% month-over-month in January.* Control group retail sales, which excludes spending at auto dealers, gas stations, office supply stores, mobile homes and tobacco stores, is expected to rise by 0.4% month-over-month after contracting by 0.45% in January for the first time since March 2023.* Resilient consumer spending has played a large role in the U.S. economic strength over the past year. Our view is that consumer spending could moderate over the coming quarters as the labor market potentially eases from the current historically tight conditions.
Brock Weimer, CFA
Associate Analyst
*FactSet
**Bureau of Labor Statistics
***CME FedWatch Tool
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