Broker Check

Market Insights – Week Ending April 12, 2024

April 15, 2024

Key Takeaways:

  • Inflation data for March was higher than expected, prompting a rise in treasury yields to YTD highs.
  • Major banks reported mixed earnings expectations, coupled with cautious macro commentary.
  • Broad risk-off sentiment on Friday as heightened geopolitical uncertainty in the Middle East sent oil prices higher.


Market Summary –

Investors were met with a busy week of market-moving news – persistent inflation, elevated rates, mixed earnings data, and heightened geopolitical tensions gave equities little relief.  Still, the weakness should not be overly surprising (market pullbacks are normal) and we have previously hinted at the market’s complacency towards some of these risks as equity valuations hover around record highs and tech-led momentum wanes. Equities have been riding a wave of momentum supported by rate-cut optimism and AI-enthusiasm, but at a certain point, momentum needs another reason to keep going. For now, the market seems set on some profit taking as participants adjust their expectations not only towards rate cuts, but broader market conditions, as well.

The S&P 500 ended lower as investors adjusted risk expectations ahead of the weekend, primarily in response to geopolitical angst as expectations rise for a direct confrontation between Israel and Iran. The consideration is that an escalation of the Israel-Hamas conflict would likely lead to a significant increase in oil prices, which would fan inflationary pressures and ultimately increase monetary policy risk. The price of crude oil has quietly crept up to $85/bbl., a nearly 20% YTD gain. The Russia-Ukraine war continues to complicate the inflationary picture as well, with continued targeted attacks on energy infrastructure.


Fed Policy & Economy –

On the economic front, headline inflation increased on a yearly basis to 3.5% in March from 3.2% in February with core inflation (excluding energy and food) unchanged at 3.8%.1 On a monthly basis, both headline and core inflation increased 0.4% above expectations of 0.3%.2 The hotter than expected inflation readings pressured equities as market participants adjusted rate cut expectations to two rate cuts before the end of 2024 (from six to start the year). Given persistent inflation, the Fed is likely to remain on a hawkish track – that is without urgency to cut rates until they see inflation reach the 2% mandate. While rate-cut hopes helped propel equity markets, the possibility of higher-for-longer rates will start to weigh more heavily on equity markets as we approach mid-year.

 

Earnings –

Adding to inflationary and geopolitical concerns, a handful of major banks reported soft earnings to kick off the Q1 earnings season, in which the market is placing a large amount of confidence in.  The hope is that a strong economy will translate into strong earnings, and more importantly, strong earnings guidance. JP Morgan (JPM) is often considered one of the highest quality banks and initially declined despite an earnings and revenue beat. Investors focused on margin compression and lower deposits impacting net interest income (NII). CEO Jamie Dimon’s comments also weighed on sentiment as he highlighted cautious macro commentary amid persistent inflation pressures – namely, the uncertainty of monetary policy risk and the impact of the Fed’s aggressive rate hike cycle. Overall, not a strong start to bank earnings and will likely cause some hesitation heading into next week.

 

Chart of The Week – Persistent Inflation

While inflation has come a long way from June 2022 highs, the downtrend has stalled above the Fed’s 2% target (dotted red line) and, along with a strong labor market, is the primary reason the Fed has been patient to cut rates.

 



Week Ahead –

This week, major market-moving economic data will include Retail Sales for March, the advanced GDP growth rate for Q1, and Core PCE inflation for March. Core PCE is the Fed’s preferred gauge for inflation and will be closely watched by market participants after last week’s higher than expected reading. The second week of Q1 earnings also begins with several major banks and a handful of key names reporting – Goldman Sachs (GS), UnitedHealth (UNH), Netflix (NFLX), and American Express (AXP).

 

As always, if you have any questions or comments please do not hesitate to reach out.


Respectfully,

Michael Neill, CFA



Source:

1,2 US Bureau of Labor Statistics

Chart: Bloomberg Finance LP


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