Daily market snapshot

• Equities see a post-Fed lift: Stocks finished higher on Thursday, finding some footing after a volatile day on Wednesday, as markets attempted to digest the message from the Fed's latest policy meeting. With equities rising and interest rates falling, the tone today appears to be one of cautious optimism that the Fed won't overreact to recent firm inflation data by tightening monetary policy further. With the latest jobs report due out tomorrow, today's action likely suggests that there is some comfort being found in expectations for ongoing healthy employment conditions. Technology, consumer discretionary and real estate, along with small-caps, led the way today, reflecting a return of risk appetite and a more upbeat mood around the cyclical outlook. Gold and oil prices were little changed, while global equities were mixed on the session.*
• Jobs, jobs, jobs: Although the Fed meeting yesterday was the headliner for the week, the spotlight will swing brightly toward the labor market, with the April employment report due out Friday morning. Rates have risen materially over the last month, as investors have come to grips with the fact that the Fed won't be able to cut rates any time soon given uncooperative inflation readings so far this year. The stock market has experienced a bit of indigestion as a result but has overall taken this adjustment relatively well, sitting just 4% below its all-time high. We attribute this to the ongoing strength in the economy that has made higher rates a bit more palatable. Thus, the attention will be squarely on the fresh labor-market data for signals around the prospects of ongoing resilience in consumer spending and overall GDP. Consensus expectations are calling for roughly 230,000 new jobs and a steady unemployment rate for the month. We think, however, that a particularly influential figure will be the trend in wage growth, as markets likely want to see that job growth is holding up at the same time that wages are normalizing, hitting the sweet spot of support for spending and relief on inflation pressures.
• Productivity remains a bright spot for the economy: The latest read on labor-force productivity showed productivity rose at an annual pace of 2.9% in the first quarter, up from 2.7% in the prior reading. Productivity growth has been a particularly bright spot for overall GDP in the last several quarters, a trend that we think has been supported by increased business investment in technology and efficiency, and also one that has the potential to be sustained longer-term by AI investments. Strong productivity growth provides a potential backdrop in which unemployment can remain low while inflation pressures simultaneously subside. One item of note in looking at the underlying data was the increase in labor costs, which jumped in the first quarter.  The annual rate of growth of labor costs has actually slowed to a more comfortable pace, but the surge to start 2024 is consistent with the recent bout of inflation worries, which will keep the market's focus on the balance between consumer prices and economic health, and on the ensuing implications for Fed policy ahead.

Craig Fehr, CFA
Investment Strategy

^*FactSet.

• Stocks closed mixed, as Fed Chair Powell downplays the notion of rate hikes:;: Stocks were mixed on Wednesday, closing below their highs of the session, after the FOMC kept rates on hold at 5.25% - 5.5%, as expected. Fed Chair Jerome Powell also indicated that is "unlikely that our next move will be a hike." Powell's personal view is that inflation will move lower later in the year, although his confidence in that view is lower after the recent string of upside inflation surprises. Markets nonetheless welcomed this less hawkish view from the Fed chair. In our view, the Fed can still be patient, but it remains on track for the first rate cut this year. Treasury bond yields also moved notably lower after the Fed meeting, with the 2-year Treasury yield down by 0.08% to around 4.95%*. These moves lower were also welcomed by markets, as the recent surge in Treasury yields had sparked volatility in both stocks and bonds.
• The Fed delivers a less hawkish message:Markets breathed a bit of a sigh of relief, as the Federal Reserve delivered a message that seemed less hawkish than expected. The Fed kept rates on hold at 5.25% - 5.5% today, as expected, and Powell's commentary during the press conference appeared less hawkish overall. While he did acknowledge the recent string of upside surprises in inflation during the first quarter has not given the Fed greater confidence that rate cuts are appropriate, Chair Powell noted that "it is unlikely that our next move will be a hike." This provided some relief to investors who were worried that rate hikes were back on the table for the Fed this year. In addition, when the Fed chair was asked if recent inflation data was anything beyond typical bumpiness, he responded with, "not really." This implies that the Fed does not see a material reacceleration in inflation ahead of us. Nonetheless, in our view, the Fed will need to see a string of lower inflation data in the months ahead before signaling a rate cut. We still believe, however, that this may happen by the back half of 2024. The Fed also outlined that it would slow the pace of its quantitative-tightening program by allowing $25 billion per month of Treasury bonds to mature from the central bank's balance sheet, down from the current $60 billion cap*. Slowing this program is also a form of policy-easing, putting less pressure on Treasury and mortgage bond markets.
• U.S. jobs report on Friday: In addition to the Fed meeting this week, investors will also digest the nonfarm-jobs report for the month of April. Expectations call for total jobs added to cool, from 303,000 last month to 240,000 this month*. The unemployment rate is expected to remain steady at a healthy 3.8%, while the important average hourly earnings figure is forecast to tick lower, from 4.1% year-over-year to 4.0%*. In our view, the U.S. labor market has been a critical element of consumer resilience, as the strong labor market has been a key reason that households continue to spend. However, we could see a downshift in the labor market, as leading indicators like job openings and quit rates have started to cool. While we would not expect a meaningful reacceleration in unemployment, some easing in the labor market – driven by increasing supply of labor and cooling demand – could cause wage gains to moderate further. In today's Fed press conference, Chair Powell also noted that a slowing labor market could be a risk to household consumption broadly. This, in our view, could also support some easing in services inflation and put downward pressure on core inflation.

Mona Mahajan
Investment Strategy 

^*FactSet.

• Stocks fall as inflation worries remain front and center: The major averages closed down by more than 1.5% on Tuesday, more than reversing Monday's rise and cutting into last week's rally, which was the best weekly gain in five months. Global markets were also down on the day, led by European stocks, which were weaker after a hotter-than-expected eurozone core inflation reading.  Oil and gold prices declined, with the latter seeing notable pressure, now down roughly 5% from the highs in mid-April. The U.S. dollar moved higher again, having strengthened significantly versus major currencies so far this year, thanks to stronger economic growth and firmer inflation compared with European and Asian economies. Overall, Tuesday's action was guided by a higher-than-anticipated reading on the first-quarter employment cost index (ECI), stoking worries of renewed inflation pressures and sapping investor sentiment, as evidenced by underperformance of cyclical investments like small-caps, energy, consumer discretionary and industrials. *
• Yields rise as Fed meeting approaches: Interest rates moved higher today, with the benchmark 10-year Treasury yield just above 4.65%, only a shade below last week's 4.7% mark, which was the highest since last November. Rates responded to the release of first-quarter ECI data, which showed that wage growth edged higher to start the year. While this is helpful for consumer spending, it's less encouraging for the inflation picture, which is squarely in focus this week, as the Fed's latest policy meeting will conclude on Wednesday. We think the outcome of that meeting is a foregone conclusion, with the Fed holding its policy rate steady. Instead, the attention will be on Chair Powell's press conference, as markets scrutinize commentary for any indications around how the Fed is processing recent persistent inflation readings and the implications that has for the potential timing of future rate cuts. Markets have significantly adjusted those expectations in recent weeks, having started 2024 with expectations for as many as six rate cuts, and now pricing in closer to one. We anticipate much of the attention will be on the Fed's evaluation of recent hotter-than-expected inflation readings, with the markets hoping that it won't eliminate the possibility of rate cuts later this year. There is also likely to be some interest in what thresholds the Fed is evaluating that would warrant consideration of a rate hike. We suspect Chair Powell may attempt to leave the 2024 rate-cut door cracked open, while also emphasizing the Fed's commitment to bringing down inflation, even if that means exerting a bit more pressure on the economy by keeping rates in restrictive territory for as long as necessary to bring inflation closer to its long-term target.  
• Big week of data ahead: As if a Fed meeting isn't enough for markets to digest, this is a jam-packed week of meaningful data releases. In addition to the Fed announcement, Wednesday will also include manufacturing and ADP private-payrolls data, while Thursday brings first-quarter data on labor productivity, which is of increasing importance given the role surging productivity has played in boosting GDP growth lately, as well as the helpful role productivity can play in curbing inflation pressures, even if unemployment remains historically low. The headliner will then cap off the week, with the April employment report due out on Friday. Consensus expectations are for roughly 230,000 new jobs in the month, holding the unemployment rate steady at 3.8%.* With inflation remaining more persistent than desired recently, indications that the economy can hold up in the face of extended high interest rates would be supportive for markets, though we suspect any significantly stronger-than-expected readings on payroll or wage growth may receive a less-than-enthusiastic response, if interpreted as an instigator of persistent upward consumer price pressures. While inflation needs to move sustainably lower, which, in our view, may require some economic softening, a resilient economy that supports healthy corporate earnings growth will, to us, go a long way to helping equity markets come to grips with the prospects of delayed rate cuts from the Fed this year.

Craig Fehr, CFA
Investment Strategy

^*FactSet.

• Stocks finish higher, adding to last week's gain: Stock markets closed modestly higher, with the S&P 500 up roughly 0.3% and adding to last week's 2.7% gain.* Sector leadership was broad, with most sectors of the S&P 500 finishing higher, led by consumer discretionary and utilities. The consumer discretionary sector received a boost from shares of Tesla, which surged over 15% following news the company received tentative approval from Chinese regulators to launch its Full Self-Driving technology.* Overseas, Asian markets finished higher overnight, while European markets were mixed, in response to a softer-than-expected economic-sentiment reading.* Treasury yields finished lower, with the 10-year yield ticking down to 4.61% and the 2-year yield closing around 4.98%.* In the commodity space, oil declined by over 1%, finishing the day below $83 per barrel. This week will be chock-full of economic data, headlined by the FOMC meeting on Wednesday and the nonfarm-payrolls report on Friday.*
• Corporate earnings and monetary policy in focus for the week ahead: Corporate earnings and monetary policy will be in focus for markets this week, with the Fed scheduled to meet on Wednesday. Consensus expectations are for the Fed to hold policy rates steady at Wednesday's meeting**, with market focus likely to center on commentary from Fed Chair Jerome Powell to gain any clues into the timing of future rate cuts. Given the hotter-than-expected inflation readings to start the year, we expect Fed Chair Powell to reiterate the need to see further progress on inflation before cutting rates. However, our view is that inflation should continue to trend lower in the coming months and that the Fed could have a credible case to begin cutting rates later this year. On the earnings front, over 170 companies in the S&P 500 are scheduled to report this week, headlined by technology heavyweights Apple and Amazon. Thus far, roughly 45% of companies in the S&P 500 have reported first-quarter earnings, with 80% of companies exceeding consensus earnings expectations.* For the full year, estimates are calling for over 10% earnings growth for the S&P 500 in 2024. With much of 2023's equity-market rally driven by expanding valuations, we believe healthy corporate profit growth will be a necessary ingredient for stocks to perform well the remainder of the year.
• Performance check-in: After a strong run that saw the S&P 500 gain over 10% in the first three months of the year, April has been less favorable for performance. Month-to-date, the S&P 500 is lower by roughly 2.9% and is on pace to post its first monthly decline since October 2023.* At a sector level, only communication services, energy and utilities have posted month-to-date gains, with all other sectors lower. Bonds have struggled in April as well, with the Bloomberg U.S. Aggregate Bond Index down roughly 2.4%.* The pullback in stocks and bonds has been accompanied by rising yields stemming from hotter-than-expected inflation, which has caused markets to lower expectations for Fed rate cuts in 2024. Despite weakness in recent weeks, we believe the road ahead for equity markets remains constructive, albeit likely not without some bumps along the way. As for bonds, we believe higher starting yields could support investment-grade bond returns in the years ahead. We recommend investors complement short-term bonds and cash with intermediate and long-term bonds, as appropriate with their risk tolerance and time horizon.

Brock Weimer, CFA
Associate Analyst 

^{*FactSet.
**CME FedWatch Tool}