By Ben Norris, CFA, Senior Investment Strategist, Vice President
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A week packed with economic data releases further clouded the view for the U.S. Federal Reserve (Fed) as it attempts to balance its battle with inflation while maintaining an even pace of economic growth. Investors, hopeful that promised rate cuts can help markets surpass recent highs, are becoming less starry-eyed as it appears the economy and labor markets remain strong despite Fed policy. Last week’s employment data reiterated strength in the U.S. labor market with job openings and ADP employment reports both coming in ahead of expectations. Thursday’s jobless claims reading continued the trend as continuing claims fell and remain below pre-COVID averages. Friday’s nonfarm payrolls report was the star of the week—a gain of 303,000 was well above the 214,000 expected and was enough to push the unemployment rate back down to 3.8% after a recent rise. Gains for January and February were also revised higher, bringing the net job gain to 325,000, the largest increase in nearly a year. Average hourly earnings rose 0.3% in March and are up 4.1% from a year ago.
A strong labor market is a welcome development in most environments, but strong wage growth could perpetuate inflationary pressures and work directly against the Fed’s recent efforts. After Friday’s very strong payrolls report, I have to believe the Fed is beginning to question its commitment to three rate cuts in 2024. I wrote a few weeks ago that it looked like the Fed would likely push back its first rate cut from March to at least May, if not later. It now appears that I was too optimistic as the market has quickly adopted the view that the first rate cut isn’t likely to happen until June. In fact, interest rate markets are now pricing in roughly two rate cuts for the rest of the year rather than the three that the Fed has been messaging for the last several months. This is a rare occurrence in the current cycle as rate markets have generally expected many more rate cuts that the Fed has been comfortable considering.
Recent commentary from Fed officials has reinforced the notion that rate cuts could get pushed back later into 2024 or even into 2025 if data continues to undermine the case for cuts. There were nearly a dozen Fed officials on the speaking docket last week, and they generally delivered a similar message—there will still be rate cuts in 2024 but economic data could alter the timing and extent of easing. The week began with Mary Daly of San Francisco and Loretta Mester of Cleveland indicating that they anticipate cuts later this year but don’t expect implementation any time soon. Chris Waller and Atlanta Fed President Raphael Bostic both went on record saying that they would prefer less than three cuts this year. Bostic expressed his concern around the slow progress that has been made bringing inflation in line with the Fed’s 2.0% target. Minneapolis Fed President Neel Kashkari, whose views often differ from consensus, suggested that while he believes two cuts will be appropriate, his ultimate decision will depend on coming inflation data. If inflation remains above target, he would support no cuts in 2024. Richmond President Barkin said the Fed still has “time for the clouds to clear” on inflation before considering cuts. And finally, Fed Chairman Jerome Powell reiterated that the Federal Open Market Committee (FOMC) will begin cutting the federal funds rate at some point in 2024, but he cautioned that the timing of the first cut will depend on a variety of economic data—especially inflation.
The Fed tends to slowly communicate its policy views over time, opting not to surprise the market with any sudden policy changes. My suspicion is that last week’s comments were the beginning of a shift in the Fed’s view that three cuts will be appropriate this year. Based on the latest economic data—employment, GDP growth and inflation—I don’t see a strong case for any cuts at all this year. Most measures of inflation continue to show that prices are increasing at a pace well above the Fed’s long-term target. The latest reading of the Personal Consumption Expenditures Price Index (PCE) saw prices increase 2.8% from a year ago, and the core PCE (which strips out food and energy prices) was up 2.5% year-over-year. This marked a full three years of inflation above the Fed’s 2.0% target. Wednesday brings an update of the Consumer Price Index (CPI) where consensus expectations see a reacceleration in price pressure on the headline number due to resurgent energy prices. Core CPI is expected to tick down from 3.8% to 3.7% but is still well above a level that would be comfortable for the Fed.
While inflation data has been closely watched for several years now, it feels as though this week’s CPI print is even more consequential than usual for the Fed and for the stock market’s next move. An in-line CPI number probably keeps the recent sideways trend in place. A hotter-than-expected print could prove as disastrous as spilling a pot of your famous chili. Stocks would likely take a step lower, and rates would continue to climb. On the other hand, a better-than-expected reading could lead to stocks reaccelerating, with recent laggards (areas like regional banks, utilities and real estate stocks) leading the move higher.
Last week was a preview of what investors can expect if inflation remains hot in the coming months. Stocks were lower across the board in the U.S., with small-cap and value stocks faring the worst. The S&P 500 lost 0.9%, while the Dow Jones Industrial Average lost 2.2%. The small-cap focused Russell 2000 index fell 2.9% as rising rates pressured smaller companies with less resilient balance sheets. Still, stocks have been able to manage very solid gains year-to-date, with the S&P 500 up nearly 10%. Much of the market’s gain has been attributed to stronger-than-expected growth, regardless of the interest rate environment. We’ll get more data on corporate fortunes over the next several weeks as the first quarter of 2024’s earnings season kicks off with large banks on Friday.
This week’s economic calendar is relatively light but will be headlined by Wednesday’s CPI reading and Thursday’s update on the Producer Price Index. Wednesday will also see the release of the FOMC’s latest meeting minutes, which should provide further insight into policy makers’ changing view of the economy and appropriate monetary policy. Consumer sentiment, which is expected to tick lower as energy prices rise, will round out the week.
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| None Scheduled | ||||
| TUESDAY, APR. 9 | ||||
| 6:00 AM | NFIB Optimism Index | March | 89.7 | 89.4 |
| WEDNESDAY, APR. 10 | ||||
| 8:30 AM | Consumer Price Index y/y | March | 3.5% | 3.2% |
| 8:30 AM | Core CPI y/y | March | 3.7% | 3.8% |
| 2:00 PM | FOMC Minutes Released | March | ||
| THURSDAY, APR. 11 | ||||
| 8:30 AM | Initial jobless claims | Apr. 6 | 215,000 | 221,000 |
| 8:30 AM | Producer Price Index y/y | March | — | 1.6% |
| 8:30 AM | Core PPI | March | — | 2.8% |
| FRIDAY, APR. 12 | ||||
| 8:30 AM | Import Price Index | March | 0.4% | 0.3% |
| Consumer Sentiment (Preliminary) | April | 78.6% | 79.4% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market