Renewed Inflation Concerns Rattle Markets

by Sequoia Financial Group
by Sequoia Financial Group

Inflation has slowed dramatically from its 9.1% peak in mid-2022[1] but remains elevated. Indeed, the latest PCE (Personal Consumption Expenditures Price Index) reading, released after financial markets closed on Friday, showed 12-month inflation of just 2.8%. But the markets and the Federal Reserve are looking for something better, as the Fed’s 2% inflation target has remained elusive. Energy prices, consumer spending, and travel costs all provided recent upward pressure on the Fed’s favored inflation index.[2]

With the next major inflation reading (March CPI) not due until April 10, markets turned to last week’s economic and employment reports, hoping that indications of a slowing economy would argue that inflation is still on a path toward 2%. However, on Monday the Institute for Supply Management’s manufacturing gauge showed US manufacturing surprisingly expanded for the first time since September 2022.[3] And after dropping 200 points on Monday, the Dow gave back almost 400 more points on Tuesday.

A strong employment report from ADP on Wednesday put added pressure on stocks. Private payrolls increased 184,000 in March, considerably higher than the 155,000 expected. ADP’s chief economist also pointed out that pay is heating up in both goods and services. Finally, Fed Chairman Jerome Powell and Atlanta Fed President Raphael Bostic signaled Fed rate cuts remain on hold. Powell spoke of stronger-than-expected pricing pressure, while Bostic told CNBC that one rate cut may be all the market gets in 2024.[4] Current expectations are for three rate cuts.[5]

The market continued its sell off on Thursday before recovering some ground on Friday. Non-farm payrolls, reported on Friday, grew more than expected, echoing the ADP report, but wage growth was in line with estimates.[6] This “Goldilocks” report, showing a strong economy without higher-than-expected inflation, provided hope that corporate earnings could stay strong while cooler inflation could allow the Fed to start cutting rates. Despite the Friday bounce, major market averages ended the week lower.

This week brings CPI and Q1 earnings from banking giants JP Morgan, Wells Fargo, and Citigroup. The banks will be looking to build on recent momentum, while CPI will be closely watched for signs that the Fed can finally start cutting rates.













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