Mar 18, 2024

Are We There Yet

Weekly Market Commentary

The road to price stability has been long and arduous. Inflation doesn’t just impact investors. It impacts everyone, from shoppers to travelers to those on a fixed income.

February’s Consumer Price Index (CPI) marks the second straight month of stronger-than-expected inflation. The core CPI, which excludes food and energy, rose 0.4% in both January and February (U.S. Bureau of Labor Statistics). The CPI rose 0.4% in February and 0.3% in January.

We hope it’s a temporary setback, but the last two months signal that the road to price stability is taking an unexpected detour in the new year.
At a minimum, it suggests the Fed can be patient as it hopes to start lowering rates later this year. It could also bolster the idea that today’s interest rates may not be as restrictive as they would otherwise appear.

The graphic below illustrates that progress has stalled. But it also shows that the rate of price hikes has gradually risen since the middle of 2023.

Others argue that the CPI’s shelter component does not correctly capture what’s happening to rent. They contend the shelter component is currently overstating costs. If shelter is removed from core inflation, prices are much more stable, rising at 2.2% annually over the last three months.

The bottom line is that investors are eyeing interest rates. If inflation remains elevated, any near-term reduction in rates is less likely.

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A Steady-as-She-Goes Fed and a Tame Inflation Report

As expected, the Federal Reserve announced last Wednesday that it held its key rate, the fed funds rate, unchanged at 5.25 – 5.50%. The Fed left the door open to a cut in rates later in the year if inflation makes meaningful progress toward its 2% annual goal or if there is an unexpected weakening in the labor market.

Strong Jobs Report, with a Caveat

The U.S. Bureau of Labor Statistics reported that nonfarm payrolls in May rose 272,000, easily beating expectations of 190,000 per the Wall Street Journal. Over the past three years, nonfarm payrolls have usually topped expectations. That narrative remains intact.

Housing Prices Hit New Record

The price of a home hit a new record, according to the latest data on housing prices. The S&P CoreLogic Case-Shiller 20-City Home Price Index, which measures monthly housing prices in 20 major metropolitan areas, rose 1.6% on a nonseasonally adjusted basis in March.

Drifting Higher

Stocks have been drifting higher for several weeks as investors search for a catalyst that could drive shares in either direction. Interest rates can influence market direction, but there hasn’t been much news recently on the rate front.

How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.