Sticky Prices...
Relentless post-pandemic inflation pushed the Federal Reserve into action by raising rates to quell consumer demand for goods and services. After dipping to near-negative territory during the pandemic as lock-downs dried up demand, inflation ignited when consumers were unleashed to spend again. Though inflation peaked in July of last year at an eye-watering annual rate of 9%, the last consumer price index for the month of May showed inflation still running at 5%. While progress has been made in cooling price pressures, overall inflation is still running more than double the Fed’s targeted rate of 2%.

Stubborn Core
Though headline inflation readings have fallen to nearly half of their July peaks, pockets of persistent price pressures still exist within markets. The so-called “headline” reading for the two primary gauges of inflation, CPI and PCE, have fallen by 46% and 38%, respectively. However, core readings of the measures, which exclude the volatile food and energy sectors, have only fallen by 17% and 13% from July. With still stubborn inflation, Federal Reserve members have made it clear that while a pause is possible, they have not ruled out further rate hikes.

Fed Focus
For more than a year now, markets have been laser-focused on trying to find a sense for when the Fed might hit the brakes on restrictive policy. Since the early phases of the hiking cycle that started more than a year ago, any hint of economic strength typically sent stocks down, as signs of a robust labor market paired with rising wages and higher prices increased the prospect of a hawkish Fed. Even though it is still possible for the Fed to continue with more rate hikes, there is now widespread opinion that a pause is a real possibility. With the potential for the end of a historic hiking cycle becoming nearer in sight, focus may now be turning to how much demand has been pummeled by a series of aggressive financial tightening moves from the Fed as they raised interest rates in an attempt to slow spending across the economy to cool inflamed price pressures.

Good is Good…
In the midst of the Fed’s aggressive tightening cycle, with investors in a good-news-is-bad-news mood, strong economic data such as monthly jobs reports showing more new positions than expected typically sent stocks falling. Although the threat of a US default may be clouding investors' reactions to recent economic data, there have been signs that investor sentiment may be shifting, with good news possibly becoming good news again. The latest monthly jobs numbers released on May 5 showed US employers added 253,000 new jobs in April. April’s solid showing compared to 165,000 new jobs in March and exceeded expectations for 180,000. Rather than send stocks lower on fears of further hikes from the Fed based on a clear indicator of a resilient labor market, investors cheered the report, with stocks closing nearly 2% higher than the day before. With reactions such as this, investors may be starting to focus more on economic strength rather than the prospects for further Fed tightening.

May 17, 2023