Stocks Rally & Yields Fall as Inflation Eases in April

Photo Credit: Luke Miller, Unsplash

Weekly Market Recap for May 17, 2024

This week, stock market indexes cemented a full recovery from April’s pullback, reaching respective records. Fed Chairman Jerome Powell’s comments that short-term interest rates, currently in the range of 5.25%-5.50%, were more likely to fall than rise in the second half of this year most visibly supported share prices. A cooler inflation report, by way of the Consumer Price Index, for April backed this rate policy likelihood. 

The consensus on Wall Street now is that the central bank will reduce rates by 25 basis points by this coming September and, possibly, another 25 basis points late in the year. The ultimate rate level will be contingent on trends in inflation and, to a lesser but still meaningful extent, the direction of wages, unemployment, and corporate earnings. 

S&P 500 Index (Last 12 Months)

S&P 500 Technical Composite (Last 24 Months)

Stocks Rally Back to All-Time Highs

The S&P 500 traded above 5,300 for the first time this week. The primary driver of equities right now is Fed expectations. This week's CPI report sparked the rally as inflation eased slightly in April after multiple months of hotter than expected data. This is a market searching for a direction as it trades from one noisy data point to another.

S&P 500 Trades Above 5,300 for First Time

Wash, Rinse, Repeat

The market is stuck in a circular pattern as it focuses on Fed policy. The circle starts with hotter-than-expected inflation prints, which cause bonds to trade lower as investors price in tighter Fed policy. The rise in yields tightens financial conditions, which moves to the next phase. The second phase of the circle occurs a few months later, as those tighter financial conditions slow the economy and ease inflation. Investors cheer the inflation print, which causes yields to reverse lower and loosen financial conditions. The economy strengthens, and activity rebounds, leading back to the cycle's start. Inflation rises, yields rise, financial conditions tighten, inflation eases, yields decline, and financial conditions loosen. The market keeps breaking the circuit by prematurely loosening financial conditions. Prior Weekly Notes discussed the Fed's asymmetric policy stance, and until the Fed introduces the potential for a hike, the market will likely keep prematurely loosening. The cycle appears to be starting over after April's inflation data this week.

Shelter Inflation

Fed Chair Powell appears unwilling to do the hard work of taming animal spirits, instead preferring to count on falling shelter inflation to finish lowering inflation. The Fed's job becomes more challenging by letting the market dictate financial conditions. Mortgage rates drop as financial conditions loosen, pulling homebuyers off the sidelines. Home prices jumped +6.4% year-over-year in February, the fastest since November 2022. The Fed and market are banking on lagging shelter inflation to get CPI back to 2%. Home prices are trending higher, which suggests shelter inflation could remain elevated.

Consumer Inflation Eased During April

Meme Stocks Roar Back

GameStop and AMC shares surged this week, signaling the return of meme stock mania. There is little to discuss here besides the theory that meme stocks are tied to financial conditions. While buying meme stocks is an irrational decision by every fundamental measure, it's not tied to loose financial conditions. The 1998-2000 dot-com bubble occurred with a 10Y yield in the 5-6% range. Conversely, a decade of zero interest rates in the 2010s didn't translate into meme stock manias in Europe or Japan. Instead, the re-emergence of meme stocks is a sign of investor confidence. Meme stocks signal the economy is solid, sentiment is positive, and there is limited financial strain, suggesting a near-term rate cut is unnecessary. 

Economic Recap

Consumer Price Index
Actual: +0.3%
Consensus: +0.4%
Prior: +0.4%
Commentary: Shelter and gasoline contributed over 70% of rise; core (ex food and energy) rose by +3.6%, the slowest pace since April 2021; major categories: food (+0.0%), energy (+1.1%), shelter (+0.4%), and medical care (+0.9%); market cheered details, but it will take more than an in-line inflation print for Fed to cut.

Producer Price Index (PPI)
Actual: +0.5%
Consensus: +0.3%
Prior: -0.1%
Commentary: Commentary: Hotter than expected, with biggest 12-month change since April 2023; PPI ex, Food, Energy, & Trade rose by +0.4% vs +0.2% last month; March revised down to -0.1%.

Retail Sales
Actual: +0.0%
Consensus: +0.4%
Prior: +0.6%
Commentary: Unchanged with March revised down by -0.1% to +0.6%; follows two strong months, suggesting demand may have been pulled forward; total sales for February 2024 to April 2024 period rose by +3.0% y/y.

Industrial Production
Actual: +0.0%
Consensus: +0.2%
Prior: +0.4%
Commentary: Flat; manufacturing fell -0.3%, but only -0.1% ex motor vehicles; mining fell -0.6% as coal plunged -18.1%; utilities +2.8%; index fell -0.4% y/y, as industrial activity holds steady despite higher rates.

Housing Starts
Actual: 1,360k
Consensus: 1,440k
Prior: 1,287k
Commentary: Single-family remains elevated; 1-month rise due to volatile multi-family segment, which remains near decade low; multi-family weakness = less inventory in coming years = more shelter inflation upside.

Import Prices
Actual: +0.9%
Consensus: +0.3%
Prior: +0.6%
Commentary: Largest 1-month change since March 2022 & biggest 12-month change since December 2022; nonfuel import prices rose by +0.7% vs +0.2% in March; data suggests U.S. is importing more inflation, with Canada, Mexico, and EU contributing to rise and Japan and China decreasing.

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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