Weekly Market Update: April 22, 2024

The Federal Reserve cannot be thrilled with the latest round of inflation data. Consumer and producer (wholesale) prices both came in above expectations for March, indicating that inflation remains quite sticky. True, price increase rates have come down significantly from their multiyear peak levels in 2022, but getting to the Fed’s target of 2% is proving arduous. Overall, the latest data suggest that inflation may be reaccelerating, especially with commodity prices continuing to surge.

Odds of an interest rate reduction before the second half of this year plummeted on the inflation headlines. The price data brought more commentary from senior Fed officials that the lead bank should keep the federal funds rate high for longer to effectively fight inflation. Treasury yields jumped on this sentiment, with the rate on the 10-year Treasury note recently topping 4.65%, a level not seen since mid-November. Equity market volatility spiked on the possibility that a rate cut may be pushed farther out.

Rising geopolitical tensions in the Middle East are troublesome. This included the first direct attack by Iran against Israel. This fighting threatens global supply chains, particularly in the energy complex. It may put upward pressure on commodities and ultimately the prices for a number of goods. Elevated commodity prices could threaten the current health of the U.S. economy, as resultant higher prices for essential items (i.e., food and energy) would probably force consumers to scale back spending on discretionary products.

First-quarter earnings season is well underway. The Wall Street consensus is calling for low single-digit profit growth for the S&P 500 companies. Of note, JPMorgan Chase, the largest money center bank in the United States, kicked off the season with earnings above expectations. That said, CEO Jamie Dimon warned that geopolitical threats and stubbornly high inflation could hurt the global economy.

Conclusion: Volatility in the equity market spiked on growing sentiment that a pivot by the Federal Reserve on the monetary policy front will likely not occur until later in 2024. Given this backdrop, and the recent jump in Treasury yields, we think a portfolio consisting mostly of high-quality stocks and cash-equivalent securities is still warranted. 

Source: ValueLine.com