This morning, the economic news was again headlined by a report on inflation. At 8:30 A.M. (EDT), the Labor Department’s companion report on producer (wholesale) prices was mixed. Specifically, the March Producer Price Index (PPI) and core PPI increased 0.2%, which were both below expectations. However, on a 12-month basis, the PPI and core PPI rose 2.1% and 2.4%, respectively. The year-over-year growth was hotter than expected, but Wall Street seemed to like the decline in the pace of month-to-month producer price growth. In a separate report, the Department of Labor reported that the initial unemployment claims for the week ending April 6th totaled 211,000, a level still indicative of a tight labor market.
The equity futures, which were notably lower heading into the economic releases, retraced a good portion of those losses on the data. The NASDAQ futures are now presaging a modestly higher opening for the technology dominated composite. The modest pull back in Treasury yields after a sharp jump yesterday was a positive catalyst for the higher-growth stocks this morning. Early today, we learned that the European Central Bank (ECB) kept its benchmark short-term interest rate the same for the fifth straight meeting, but left open the possibility of a cut at its June meeting. However, the ECB issued similar remarks to those of the U.S. Federal Reserve Bank, including that it would like to see more signs that inflation is heading downward on the Continent before it considers cutting interest rates.
In general, the focus of Wall Street this week has been the latest round of inflation data and what impact it will have on the Federal Reserve’s near-term monetary policy course. The big report came yesterday, when the Labor Department reported that the Consumer Price Index (CPI) and the core CPI, which excludes the more-volatile food and energy components, came in above forecasts. The increase in March consumer price growth and the recent strong jobs creation figures will likely put no additional pressure on the central bank to reverse monetary policy course.
The odds of an interest-rate cut at the June and July Federal Open Market Committee (FOMC) meetings cratered on the CPI data, as well as the calls for multiple rate reductions this year. This sentiment was echoed in the minutes from the March FOMC meeting, which were released at 2:00 P.M. (EDT) yesterday. The readout showed that central bank policymakers will need to see inflation come down further before they deem it is appropriate to begin cutting interest rates. Clearly, yesterday’s CPI data did not provide that motivation for the Fed. Treasury market yields spiked on the CPI report and sparked a selloff in the equity market. The Dow Jones Industrial Average, the broader S&P 500 Index, and the technology heavy NASDAQ Composite fell 422, 49, and 136 points, respectively.
The spike in Treasury yields on the hotter-than-expected pricing data and the likely uptick in lending rates in the coming weeks pummeled the interest-rate sensitive sectors yesterday. There was notable selling among the stocks of the interest-rate sensitive small-cap companies, along with the real state stocks and the higher-yielding utilities. The prospect of elevated Treasury yields for longer period makes Treasuries a more-attractive option versus higher-yielding utilities stocks to income-oriented investors. In particular, the utilities, which were performing well on the possibility of the Fed soon cutting interest rates, sold off sharply during yesterday’s bearish session.
Investors should note that first-quarter earnings season will commence tomorrow, with the latest quarterly results from big bank money center JPMorgan Chase (JPM). Wall Street will be examining the latest round of bank results and commentary for signs of any increasing stress in the financial system. Overall, the consensus forecast is for S&P 500 first-quarter profit growth in the area of 3%. We think earnings gains will be needed to justify the S&P 500 Index’s elevated price-to-earnings multiple, which stands above 20 entering earnings season. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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