Weekly Market Update: April 24, 2023

The March price data showed a moderation in headline inflation. On the heels of a benign 0.1% increase in the Consumer Price Index (CPI), the Labor Department’s companion report revealed that the Producer Price Index (PPI) fell 0.5%. On a 12-month basis, the CPI and PPI rose 5.0% and 2.7%, respectively, both notably below recent high-water marks.

So why have these inflation reports not changed the narrative about the Federal Reserve’s next monetary policy decision? That is because when looking beyond the headline figures, inflation remains sticky. The core CPI, which excludes the more volatile food and energy components, rose a stronger-than-expected 5.6% last month. And, according to the New York Federal Reserve’s Survey of Consumer Expectations, the median expectation is that the inflation rate will be 4.7% one year from now, still well above the Fed’s target rate of 2.0%. The consensus is that the central bank will raise the federal funds rate by a quarter point, to 5.00%-5.25%, at its May monetary policy meeting.

Meantime, first-quarter earnings season is heating up. Investors were particularly interested in the results from the banking industry, which has dealt with turmoil created by the collapse of a few regional banks in March. The results were mixed, with most of the big banks beating profit prognostications, but also warning that conditions may deteriorate if a recession unfolds. On a positive note, several smaller regional banks did not show a notable drop in deposits, which caused the liquidity drain at the now defunct Silicon Valley Bank.

The economy is weakening. This is evident in contracting manufacturing activity, slowing non-manufacturing (services) growth, and declining home sales. The Fed also is closely monitoring the health of the consumer sector, which was the backbone of the economic recovery from the COVID-19 pandemic.The 1% decline in March retail sales may indicate that the U.S. consumer is now feeling the ill effects of inflation and the resultant higher borrowing costs.

Conclusion: Wall Street is dealing with a lot of uncertainty these days and that historically has not made for an ideal backdrop for investing. Thus, we continue to recommend a cautious near-term investment stance. 

Source: ValueLine.com