Stock market futures are not pointing to a favorable open today.
One data release was made this morning, that of import prices. This index showed a modest contraction of 0.2% for the month of January, better than economists had expected, versus a 0.4% expansion in the final month of 2022. The import price data provides a modicum of welcome news on the inflation front.
Currently, Richmond Federal Reserve President Tom Barkin and Fed Governor Michelle Bowman are speaking on the health of the economy, and giving their opinions on how the central bank should proceed in its inflation-fighting strategy. Comments by St. Louis Fed President James Bullard included the possibility of a 0.50% rate hike in March. Likely hawkish pronouncements may well pressure stock prices through today’s close.
Both the blue-chip Dow Jones Industrial Average and the broader Standard & Poor’s 500 Index could wind up in the red for all of this week. The tech-heavy NASDAQ Composite might be able to post a slight gain.
Earlier in the week, investors digested the January reading on the Consumer Price Index (CPI), which showed a continued slowing in the rate of inflation, but not as much as many on Wall Street had been anticipating. After initial gains, the markets headed lower until noon, but recouped losses to the trading day’s end.
Wednesday morning stocks came under pressure when stronger-than-expected retail sales growth figures were released. Investors began to worry that this measure will give the Fed more reason to keep raising short-term interest rates and keep them elevated for an extended period of time. Tepid manufacturing, industrial production, and capacity utilization numbers helped to temper the pressure on share prices, allowing them to firm as the day wore on.
Yesterday morning, the markets reacted to news of lower-than-expected initial jobless claims for the week ended February 11th, increases in January producer prices, flat building permits and weaker housing starts for last month, and a negative February manufacturing survey from the Philadelphia Fed. The three major market indexes each lost more than 1% by day’s end.
The Federal Reserve’s next rate action comes in March. Until recently, market pundits had been expecting another one-quarter of a percentage point hike in fed funds rates, to 4.75%-5.00%, and then a similar action in May, bringing the rate range to 5.00%-5.25%, followed by a pause. Lately, however, a few Fed officials have voiced opinions that, perhaps, a larger hike should be implemented next month, or that the rate raising regimen ought to be extended to the month of June or even beyond. This suggests rates could ultimately increase to 5.25%-5.50%. Investor hopes of a pause in the near term, and rate cuts before year end 2023, are fading.
Year to date, the stock indexes remain in positive territory, with the NASDAQ still in the lead and the Dow Jones trailing behind. Low unemployment, ongoing wage growth, higher consumer spending (focused on services, as opposed to goods), and stubborn inflation gains give the Fed reasons for continuing to raise rates, while reducing its balance sheet, via maturing bonds, to limit liquidity in the markets. Conversely, Fed officials will have to consider the slowing housing market, rising consumer debt, and slackened activity in the manufacturing and industrial sectors. Raising rates by too much and/or for too long could result in a mild, or worse, recession. No doubt, the central bank will continue to closely monitor economic data in the weeks ahead. In the meantime, we advise investors to hold significant portfolio weightings in high-quality growth and defensive issues. Persisting economic uncertainty, as well as political risks (e.g., U.S. debt-ceiling negotiations, the Russia-Ukraine conflict), suggest that the broader stock market could be range bound to the close of 2023.
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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