Weekly Market Update – March 15, 2024

Quick Takes

• Inflation isn’t going away anytime soon. Consumer inflation, wholesale inflation, and import prices all showed that prices remain stubbornly high and that traders were right to reset expectations for the Federal Reserve to first cut rates in June, not in March or May.
• With inflation accelerating, stocks were down, as Technology stocks lagged and the Energy sector outperformed. The S&P 500 was down -0.1%, the Nasdaq fell -0.7%, and the Russell 2000 dropped -2.0%.  
• Treasury yields jumped last week with the U.S. 10-year Treasury yield up +23 basis points to yield 4.31%. In the worst week for bonds this year, the Bloomberg U.S. Aggregate Bond Index was down -1.2%, while the Bloomberg Global Aggregate ex-U.S. Bond Index fell -1.4%.

Stocks can’t shrug off hot inflation, bonds worst week in 2024

The message that inflation isn’t going away anytime soon was clear last week. Economic releases covering consumer inflation, wholesale inflation, and import prices all showed that prices remain stubbornly high and that traders were right to reset expectations for the Federal Reserve to first cut rates in June, not this coming week or in May. Stocks actually gained after Tuesday’s hotter-than-expected Consumer Price Index (CPI), but after the Producer Price Index (PPI) and Import Prices also accelerated, while Retail Sales were weaker than expected, investors curbed their enthusiasm and stocks traded down. The S&P 500 Index posted its second-straight weekly loss, with Technology stocks contributing to the decline, while the Energy sector outperformed as WTI Crude Oil jumped +3.9%. For the week, the S&P slipped -0.1%, the tech-heavy Nasdaq fell -0.7%, and the small cap Russell 2000 slumped -2.0%. Things weren’t much better overseas, with developed market international stocks (as measured by the MSCI EAFE Index) down -1.4% and the MSCI Emerging Markets Index sliding -0.2%. 

The rise in inflation data was even less welcome by bond investors. The U.S. 10-year Treasury yield jumped +23 basis points to yield 4.31%, and the shorter 2-year U.S. Treasury yield popped +25 basis points higher to finish the week at 4.73%. The U.S. Dollar Index rose with yields, increasing +0.7% over the week. The higher yields and U.S. dollar helped push bond returns lower as the Bloomberg U.S. Aggregate Bond Index lost -1.2% for the week, and the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) was down -1.4%. This week’s Federal Reserve policy meeting is not expected to have any chance for a rate cut, but now the June meeting is beginning to be doubted for an initial cut by the Fed. At the beginning of the month, markets priced a better than 95% chance of a rate cut from the Fed, but with the stronger-than-expected inflation data, those odds were trimmed to 61%, according to the CME FedWatch Tool.

Chart of the Week

Inflation accelerated again in February, with the headline Consumer Price Index (CPI) increasing +0.4% for the month, in line with Wall Street expectations but above the prior month’s unrevised +0.3% uptick. Year-over-year (YoY) CPI grew at a 3.2% rate, up from an unrevised +3.1% rate the prior month which is also what Wall Street expectations were calling for. It hasn’t been below 3% since March 2021. Importantly, Core CPI, which excludes the more volatile food and energy prices, was unchanged from the prior month at +0.4% but above expectations of +0.3%. YoY Core CPI was +3.8%, higher than expectations for +3.7%, but down a tick from the prior month’s +3.9% annual rate. Though both measures are well off their 2022 peak levels, they still remain stubbornly higher than the Fed’s +2% target. Higher gas prices and housing costs drove the higher cost of living. Overall, energy costs saw an increase of +2.3% increase, with gasoline jumping +3.8%. Shelter climbed another +0.4%. Together, the increases in energy and shelter amounted to more than 60% of the total gain. In a welcome sign, food costs were flat on the month. The report is likely to discourage the Fed to start cutting rates until there’s a clearer deceleration in the rate of inflation. The Fed also tends to pay more attention to the core version of the Personal Consumption Expenditure (PCE), which it views as a more accurate gauge of inflation and is released at the end of the month.

Consumer Inflation Remains Well Above Fed’s Target

Headline and Core CPI Year-over-Year Percent Change

Source: U.S. Bureau of Labor Statistics, CNBC.
Data as of March 12, 2024.

Economic Review

• Like consumer inflation, wholesale inflation rose more than expected in February. The headline Producer Price Index (PPI) was up +0.6%, above the prior month’s unrevised +0.3%, where it was expected to stay. That was the largest monthly jump since last August. Year-over-year (YoY) PPI accelerated to +1.6%, above expectations for +1.2%, and up from the +1.0% annual rate the prior month (revised up from +0.9). Core PPI, which strips out volatile Food and Energy costs, was up +0.3%, also above expectations for +0.2% but down from the unrevised +0.5% increase the prior month. Year-over-year (YoY) Core PPI was unchanged, up +2.0%, which was above expectations for +1.9%. Similar to CPI, energy prices boosted PPI, rising +4.4% for the month. Food prices were also up, increasing +1.0%. Both the CPI and PPI reports feed into the Fed’s preferred inflation tracker, the Personal Consumption Expenditures (PCE) index, so it’s likely it will be elevated when released at the end of the month.
• February Import Prices rose +0.3% after an unrevised +0.8% jump the prior month and matching Wall Street expectations. Import prices fell in the final months of 2023, helped by lower oil prices, but have been on the rise back-to-back months as oil prices have crept higher. Export Prices were also up +0.8%, down from the prior month’s +0.9% rise (revised up from +0.8%) and two times above expectation for a +0.4% rise. Export prices are down -1.8% over the past year, slower than the -2.2% annual drop the prior month (revised up from the originally reported -2.4% decline).
• The Commerce Department reported that U.S. Retail Sales rose +0.6% in February, the largest jump since September, following the prior month’s -1.1% decline (revised down from -0.8%), but below expectations for a +0.8% gain. Retail sales represent about one-third of all consumer spending and offer clues on the strength of the economy. Spending on Autos rebounded +1.6% month-over-month after declining -2.1% in January. Gasoline station sales increased +0.9% month-over-month after falling -1.4% in January. Sales ex-autos and gas were up +0.3% versus the prior month’s -0.8% drop, which was revised down from -0.5%. The Control Group, a figure used to calculate GDP, was flat, far below expectations for +0.4%, but up from the -0.3% decline the prior month.
• February Industrial Production rose +0.1%, above expectations for a flat reading and the prior month’s -0.5%drop. That was revised sharply down from -0.1% and December was also downwardly revised to a -0.3% loss.  Manufacturing rose +0.8% after dropping -1.1% the prior month. Capacity Utilization, a measure of potential output, was unchanged at 78.3%, short of expectations for 78.5%. It’s the third straight month production has been weak. 
• The Treasury Department reported that the U.S. Federal Budget Deficit widened to $296.3 billion in February, up from $262.4 billion the same month last year and slightly below expectations for $298.5 billion. For the five months in fiscal 2024 (October through February), the deficit widened to $828 billion, up from $723 billion for the same period last year. Year-over-year (YoY) Government Receipts rose about +3.4% but Government Spending rose more than twice that pace at +8.2%. Receipts were up $9 billion from a year ago to $271.1 billion, while spending rose $43 billion to $567.4 billion, primarily from defense spending and to refill the Strategic Petroleum Reserve. The federal government has approved an approximately $460 billion bill to fund about half of nondefense discretionary federal government operations. A recently passed continuing resolution extended funding for defense and the other half of the nondefense budget to March 22. Risk of a partial government shutdown has been significantly reduced in recent weeks but nonetheless remains.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index slipped -0.5 points in February to 89.4, below expectations of 90.5 and the lowest level since May 2023. Weakness was broad-based, with the seven of the 10 components declining on the month.  Employment items remain positive but weaken again. Plans to Increase Employment deteriorated further, slipping -2 from the prior month to a net 12% of small business owners that plan to create new jobs in the next three months, the lowest level since May 2020. Current Job Openings also slipped -2 to a net 37%. Reports of Earnings Trends dropped -1 points to a net -31%. Concerns over inflation are again a pain point for small businesses, with 23% citing it as the single most important business problem in operating their business, up +3 points from the prior month and replacing labor quality as the top problem cited.
• The preliminary reading of the March University of Michigan Consumer Sentiment Index fell a bit from a 32-month high of 79.6 to 76.5. That was a bit light of expectations for 77.1. The Current Economic Conditions component was unchanged at 79.4. The Consumer Expectations component fell to 74.6 from 75.2 the prior month. One-year inflation expectations were unchanged at +3.0% and just under expectations of +3.1%. The five-year inflation expectations were also unchanged at +2.9%, matching expectations.
• Weekly MBA Mortgage Applications jumped +7.1% for the week ended March 8, following the prior week’s +9.7% rise. The Purchase Index was up 4.7% following a +10.6% surge the prior week. The Refinance Index was up +12.2% following a +8.1% gain the prior week. The average 30-Year Mortgage Rate slipped to 6.84% versus 7.02% the prior week, the third consecutive decline after five straight weekly increases. 
• Weekly Initial Jobless Claims fell -1,000 to 209,000 for the week ended March 9, below expectations for 218,000. The prior week was revised down -7,000 to 210,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose by +17,000 to 1,811,000 in the week ended March 2, below consensus estimates for 1,905,000 and last week’s reading of 1,794,000 (revised down from 1,906,000)

The Week Ahead

The Federal Reserve meeting will be in the spotlight this week, but with last week’s hot inflation data, traders have essentially given no chance for a rate cut at this meeting, with a 99% chance that the Federal Open Market Committee (FOMC) keeps interest rates on hold. The market has reset pricing for a first quarter-point rate cut in June. Aside from Fed watching, most of the week’s data centers on the housing market, with the NAHB Housing Market Index for March, the February Housing Starts and Building Permits, and February Existing Home Sales are all due. The Conference Board’s Leading Economic Indices (LEIs) and S&P Global’s U.S. Purchasing Managers Indices (PMI) will also garner attention.

Did You Know?

NEW HIGH IN NEW HIGHS – The net number of S&P 500 stocks hitting 52-week highs has been in positive territory for more than 80 straight trading days, and on March 4, just under 20% (19.5%) of the index hit a 52-week high, which was the highest reading in nearly three years (Source: Bloomberg).

SANGUINE STREAKS – Through Friday, the S&P 500 has gone 268 trading days (just over a year) without experiencing a one-day decline of 2% or more. While the current streak is the fifth longest since 1990, it still pales in comparison to the record 949 trading days (or 3.75 years) without a one-day 2%+ drop that ran from May 19, 2003, to February 26, 2007 (Source: Bespoke).

401(K) MILLIONAIRES – The number of 401(k) accounts worth $1+ million at Fidelity jumped 41% in 2023 from 299,000 to 422,000. The average 401(k) millionaire at Fidelity is 59 years old and has been saving for 26 years (Source: Fidelity, YAHOO! Finance).

This Week in History

FAKE TRADES – On March 15, 1817, the New York Stock Exchange prohibited the “fictitious sales,” or wash sales, that had enabled speculators to manipulate individual stocks without even owning them. Nevertheless, the practice continued unabated for decades more (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.