Weekly Market Update: April 10, 2023
The Federal Reserve received some welcome news on the inflation front. The Personal Consumption Expenditures (PCE) Price Index, the measure of inflation most closely followed by the central bank, rose 0.3% in February, half the rate of the January advance. On a 12-month basis, the PCE Price Index increased 5.0%, which was again down from the January reading.
February inflation data, though, still suggest more work needs to be done to tame prices. Even with the growth of the PCE Price Index easing some in February, the one-year pace was still running well above the Fed’s target of 2.0% price growth. The main question is whether the February reading was the start of a downward trend in prices—with the full effects of the Fed’s most restrictive monetary policies in four decades starting to be felt—or if the Fed will still need to push interest rates even higher. That said, the decision by the Organization of the Petroleum Exporting Countries (OPEC) to cut production will likely put upward pressure on oil prices and add to inflation concerns.
The Fed’s inflation battle may come at the expense of the U.S. economy. Although the still-tight job market suggests the economy is healthy, other sectors are weakening. The Institute for Supply Management reported that manufacturing activity fell 1.4 percentage points, to 46.3%, in March. It was the fifth-consecutive monthly contraction and the lowest level since May, 2020.
How much longer can the average consumer keep spending? There are signs that consumers are becoming a bit more cautious, particularly with regard to spending on discretionary goods. Perhaps, the higher borrowing rates are now giving them some pause. It should be noted that six of the seven largest monthly increases in revolving credit in more than 50 years of record keeping have occurred in the last year. This may raise the level of stress in the consumer credit sector, much as we recently saw in the banking industry.
Conclusion: The U.S. stock market rallied at the start of April. However, many of the headwinds for investors (i.e., uncertain Fed policy, inflation, and slowing growth) remain in place. Thus, we continue to recommend considerable caution in this uncertain investment environment.