Market Trends

Market Momentum Stalls as Inflation and Growth Concerns Trouble Investors

Investors found themselves on uncertain terrain as recent data pointed to a slowing economy afflicted by tenacious inflation. This troubling trend poses significant challenges to the outlook of investors who had been anticipating rate cuts from the Federal Reserve.

Equities oscillated and bond yields ticked upwards in response to a report revealing a decline in U.S. consumer sentiment to the lowest it has been in six months. The downturn in sentiment closely relates to increased short-term inflation expectations. While a deceleration in key market sectors has stoked speculation of Federal Reserve easing, a consistent message from several Fed officials underscores a commitment to maintain higher interest rates longer in an effort to steer inflation back towards the 2 percent target.

"The Fed is navigating through a precarious landscape as it seeks to uphold its dual mandate of price stability and growth," suggested Jeff Roach from LPL Financial. He further elaborated that although it is not their primary expectation, the rising risks of 'stagflation' are becoming a prominent issue for the markets.

The S&P 500 experienced fluctuations around the 5,220 mark, marking its third consecutive week of active gains—the lengthiest sequence of advances since February. In a similar vein, the Dow Jones Industrial Average has ascended successively over eight sessions.

Yields on Treasury 10-year notes experienced an elevation of five basis points, reaching 4.50 percent. Meanwhile, Federal Reserve swaps highlighted that traders have fully accounted for a rate reduction by November and anticipate a second cut by the subsequent January gathering.

In a note of caution, Chris Zaccarelli from the Independent Advisor Alliance pointed out that inflation has been so dominant in this year's discourse that the vital role of consumer spending in the economy is often overlooked. Consumer spending is regarded as the economy's mainstay and the recent dip in consumer sentiment numbers sends a signal that the vigor of the consumer should not be taken for granted. Compounding the issue, inflation expectations are also on the rise, translating to a dual setback for Federal Reserve policies.

Zaccarelli further highlighted a looming risk wherein a slowdown in spending coupled with an uptick in inflation could lead to a scenario contrary to the preferable 'Goldilocks' economic state that many aspire for. This situation would render the Federal Reserve's decision-making process particularly challenging, compelling the institution to choose between supporting a slackening economy and contending with burgeoning inflation expectations.

Fed Bank of Dallas President Lorie Logan, along with Governor Michelle Bowman, reinforced the sentiment that it may be premature to contemplate reducing borrowing costs. Bowman in particular has projected that it would not be prudent for the Fed to initiate interest rate reductions in 2024, attributing this to persistent inflation observed in the year's earliest months.

On an optimistic note, Fed Bank of Chicago President Austan Goolsbee contended that inflation may not be persistently above the central bank's target, despite data from the start of the year indicating escalating price pressures. Chairman Jerome Powell, in his address following the Fed's late April meeting, intimated that policymakers are likely to maintain elevated interest rates for a considerable period, noting his uncertainty regarding the time frame required for the confidence to lower rates. He also dismissed concerns surrounding 'stagflation' in the context of growth or inflation.

A compilation of economic data that fell short of expectations—including figures related to jobs, services, and manufacturing—has plummeted the U.S. rendition of Citigroup's Economic Surprise Index to its nadir since the inception of 2023. This index calibrates the variations between actual economic releases and the predictions of analysts.

Bill Adams of Comerica Bank provided his insights into the economic trajectory, stating, "Economic growth slowed considerably in the first quarter and will most likely continue at a subdued pace for the remainder of 2024." He also conveyed the financial market's expectation for the Fed to initiate rate cuts by the year's end, with the likelihood of two quarter-percentage-point reductions being greater than just one.

Turning to Friday's consumer sentiment report, Peter Boockvar emphasized the detrimental impact that the persistent high-interest rate environment has had on purchasing conditions for costly items. Boockvar, the author of The Boock Report, reminisced, "A few years back when the Fed was aggressively pushing up interest rates, my fear was more about a slow economic suffocation than a swift and dramatic economic decline—and I stand by that. The current situation seems to resemble a 1.5 percent type economy rather than the 3 percent range some still believe we're in."

Don Rissmiller of Strategas remarked on the shifting tone of central banks like the Fed, noting a more aggressive stance in light of the erratic data for growth and inflation. He theorized that any signs of instability in the U.S. job market could quickly tilt the balance in favor of imminent rate cuts. "We should expect to hear more discourse on the Fed's dual mandate if such a shift becomes necessary," he observed.

As investors look to the future, attention will be centered on Chairman Powell's upcoming remarks during a scheduled event on Tuesday. Moreover, a deluge of economic reports is on the horizon, with the consumer price index on Wednesday poised as a standout event. "We perceive the risks surrounding the CPI report as slightly bullish for rates," stated strategists from Bank of America Corp., including Mark Cabana.

According to Gennadiy Goldberg and Oscar Munoz from TD Securities, real rates currently hold appeal as the carry remains positive into October. However, the unpredictability of market conditions might prompt investors to adopt a cautious stance. They anticipate a gradual moderation in growth and inflation figures, which is expected to drive rates downward toward late-2024, aligning with their forecast for the Fed to commence easing in September.

Corporate Highlights

The corporate sector saw several noteworthy developments:

• McDonald’s Corp. anticipates rolling out a $5 meal deal across its U.S. chains, which it hopes will attract budget-conscious consumers. Learn more about McDonald's strategy here.
• In a response to previous backlash and revenue impacts, Target Corp. has decided to omit LGBTQ-themed merchandise in some locations for Pride Month in June. Explore Target's initiatives.
• A landmark $1.2 billion licensing agreement was cemented between Novavax Inc. and Sanofi, which includes the commercialization of a Covid-19 and flu combination vaccine. Read more on the Novavax-Sanofi partnership.
• The FDA's verdict on Moderna Inc.’s RSV vaccine is on hold due to 'administrative constraints', as Moderna vies to market its second product. Get the latest updates from Moderna.
• 3M Co. received a rating boost to 'buy' by HSBC, citing early signals of growth and improvement in margins due to restructuring. Analyse the performance of 3M.
• Taiwan Semiconductor Manufacturing Co. reported a staggering 60% increase in April sales, bolstered by consistent demand for artificial intelligence and the recovering consumer electronics sector. Discover Taiwan Semiconductor's technology advancements.
• Sweetgreen Inc. saw a jump in share value after the company revised its annual sales forecast and demonstrated heightened profitability, as it aims to broaden its footprint. Check out Sweetgreen's financial growth plan.

Market Movements at a Glance

Stocks

The stock market exhibited measured growth with S&P 500 inching up by 0.2 percent as of closing time in New York. The Nasdaq 100 saw a modest rise of 0.3 percent, paralleled by a similar 0.3 percent gain in the Dow Jones Industrial Average. The global MSCI World index also witnessed a 0.3 percent rise.

Currencies

Currency markets showed minimal changes with the Bloomberg Dollar Spot Index remaining relatively static. The euro and British pound both held their ground, each undergoing negligible alterations at $1.0772 and $1.2527, respectively. However, the Japanese yen depreciated slightly by 0.2 percent against the dollar.

Cryptocurrencies

The volatile nature of cryptocurrencies was on display as Bitcoin and Ether experienced downturns of 3.3 percent and 4.1 percent, respectively.

Bonds

On the bonds front, the yield on 10-year Treasuries increased by five basis points to 4.50 percent. Yields for Germany’s and Britain’s 10-year bonds saw minor increases as well.

Commodities

In commodity trading, West Texas Intermediate crude oil witnessed a drop of 1.2 percent to $78.33 per barrel. Contrarily, spot gold rose by 0.7 percent, reaching $2,363.83 an ounce.

Looking Forward: Economic Indicators and Federal Reserve Insights

As the market continues to grapple with a blend of positive and negative signals, the week ahead promises crucial insights that could shape investor sentiment. Economists and traders alike will be keeping a close watch on Federal Reserve Chairman Jerome Powell's commentary and a collection of critical economic indicators, with the consumer price index taking center stage. How these developments influence rate expectations and market momentum will be telling, and could set the tone for financial markets as we move through 2024.