Inflation Continues to Run Hot in Fresh March Data
In March 2024, the U.S. annual inflation rate spiked to 3.5%, a strong move upward from the previous month’s 3.2%. The market had anticipated just a 3.4% increase. The monthly change in inflation was steady at 0.4% which disappointed markets expecting a cooler 0.3%. Core inflation rates offered no refuge for market participants. Both monthly and annual core inflation did not cool and instead steady at 0.4% and 3.8% respectively. SPX was down near 1% on the Wednesday news; hotter than expected inflation will likely force the Fed to rethink interest cuts in 2024.
Producer Price Inflation Data Helpful to Inflation Fight
Markets, aided by the Thursday PPI print, rebounded from a down day on Wednesday that saw fresh CPI data throw cold water on hopes that inflation was under control. Producer price inflation measures the price for commodities sold for personal consumption, capital investment, government, and export. In March 2024, the U.S. saw a modest 0.2% rise in producer prices. This marked the smallest monthly increase in three months. It came after a 0.6% increase in February and fell short of the anticipated 0.3% rise.
Michigan Consumer Sentiment Down; Inflation Concerns Grow
In April 2024, the University of Michigan reported that its consumer sentiment index in the U.S. dropped to 77.9 from March's 79.4, the peak since July 2021. This preliminary data was unexpectedly lower than the predicted 79. The decline was noted in both current conditions and future expectations. The public is not awarding the current administration for a strong underlying economy and seems to instead be focused on upcoming political tumult surrounding the November presidential election. In addition, there is growing concern about inflation as year-ahead expectations rose to 3.1% and the five-year forecast increased to 3%. This data adds to the growing concern inflation is not tamed and may restart a new uptrend.
Earnings Season Begins with Disappointing Big Bank Reports
JP Morgan Chase, Wells Fargo, and Citigroup reported Q1 profits and revenues that beat expectations while their executive teams each commented on the health of the American economy and consumers in general. These reports would normally be a positive force for equity markets, but it was the cautionary guidance on lending incomes that market participants found troubling. Higher for longer interest rates forces banks to pay out more on their deposits which threatens future earnings. After the Wednesday CPI print reduced expectations for Fed-driven interest rate reductions, these initial earnings calls signaled that prevailing high interest rates are starting to create real drag on corporate profitability. As SPX ended Friday trading down 1.46% and the week overall down 1.5%, market participants seemed left with both diminishing chances for interest rate cuts and concern for upcoming regional bank earnings reports. Not only would higher interest rates bite smaller banks just as they did larger ones, but the commercial real estate problem is a proportionally larger one for these smaller banking institutions.
Threat of Widening War in the Middle East
U.S. intelligence is widely reporting Friday evening that an Iranian retaliatory strike on Israeli assets or the Israeli state itself is imminent. Such an attack has been expected after an Israeli airstrike on an Iranian consulate in Damascus, Syria which killed Iranian military leaders. Israeli government officials have stated they would seek to attack the Iranian state if directly targeted. The U.S. has since October 2023 worked to prevent such an escalation which is now seen as more and more likely by the day. The most direct concern for market participants would be military conflict affecting the flow of oil into global energy markets.
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