It was a short week regarding economic news and trading days, as markets were closed on Friday. The close of trading Thursday brought the end of the quarter, and what an impressive three months it was. Equity markets were higher across the board, with the S&P up around 10%, the Dow Jones Industrial Average up 6%, and the Russell 2000 (small-caps) up about 5%.
The only economic news of substance this week was the release of the PCE price index data. However, not only were the numbers precisely as expected, but the data was also released on Friday morning, so markets were unable to reflect the new information. With that said, given what was in the report, there should not be a significant impact, as the narrative from last week remains unchanged.
Overall, headline PCE came in at 2.5% YoY, slightly higher than January’s 2.4% (but only two-hundredths of a percent). And, as previously noted, this was identical to expectations. Core PCE came in at 2.8% YoY, again, on consensus and 0.1% lower than in January. If you recall last week’s market update, the Fed estimates Core PCE will drop to 2.6% by the end of the year. So, on the surface, we are still moving in the right direction.
However, the month-over-month numbers look a little less rosy. Core PCE was up 0.26% MoM, or up 3.2% annualized (the compound increase of 0.26% for 12 months). That means if the disinflation trend does not continue, or, said another way, if inflation continues at its current pace, the Fed’s year-end goal will not be achieved. However, to reach 2.6% Core PCE by the end of the year, inflation will merely have to drop from 0.26% MoM readings to 0.19% MoM readings (on average) for the rest of the year. And while that may not sound like a lot, it’s the difference between 3.2% and 2.3% annualized inflation.
To wrap this up, we are not out of the woods yet on inflation. Not only do we need to see improvements, but they need to be consistent to achieve the Fed’s target. And if there comes a point when the target no longer seems achievable, that likely will coincide with a more hawkish Fed and fewer interest rate cuts than planned. We’ll continue to watch the data as it becomes available.
Economy
- It was a quiet, short week in the markets, with the S&P 500 up 0.4%, the Nasdaq down -0.3%, and the small-cap Russell 2000 up 2.5%.
- According to the third estimate from the BEA, the U.S. economy expanded an annualized 3.4% in Q4 2023, slightly above the 3.2% previously reported.
- The University of Michigan consumer sentiment for the U.S. was revised higher to 79.4 in March from a preliminary of 76.5, the highest since July 2021.
Stocks
- U.S. equities were in positive territory. Utilities and Real Estate were the top performers, while Technology and Communication Services lagged. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased one basis point to 4.21% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
