Wall Street traders fearing another ultra-hot inflation report got a degree of relief after the Federal Reserve’s favored price gauge came roughly in line with estimates, with stocks climbing amid a rally in big tech.
Equities extended this week’s gains as the personal consumption expenditures index — while still strong — wasn’t enough to further erode the case for interest-rate cuts this year. As a result, bond yields dropped across the US curve and swaps showed slightly higher odds of policy easing in 2024.
Just a few days ahead of the Fed decision, traders took some comfort in Friday’s data — especially after quarterly figures this week suggested upside risk to inflation. The so-called core PCE, which strips out the volatile food and energy components, increased 0.3% from the prior month. From a year ago, it advanced 2.8%.
“Every new inflation print has elevated importance, and the market was in need of an ‘in-line’ print to confirm that the Fed wasn’t starting to lose this battle,” said John Kerschner at Janus Henderson Investors. “Although inflation is still too high for the Fed’s comfort, if progress does continue, it still may be reasonable to assume one, maybe two, cuts in 2024.”
The S&P 500 approached 5,100, with Microsoft Corp. and Google’s parent Alphabet Inc. leading a rally in megacaps after stellar results. Two-year-yields dropped three basis points to 4.97%. The yen hit a a fresh 34-year low against the dollar, heightening speculation authorities may intervene to stop the decline.
To Clark Bellin at Bellwether Wealth, Friday’s PCE print keeps rate cuts on the table for 2024, but more likely towards the end of the year, which will allow the Fed to analyze a few more inflation reports.
“We believe the stock market can power through these elevated interest rates, as earnings are still fairly strong and companies are figuring out how to still thrive in this high interest rate environment,” he noted. “While investors would welcome lower interest rates, the market can continue to climb even if we see no rate cuts this year.”
Bellin says investors should continue to be on the lookout for opportunities in the market and consider taking advantage of the recent pullback, where “many quality stocks went on sale.”
The US equity market will continue to rely on a handful of megacaps stocks for direction until an uptick in real interest rates ignites recession fears, according to Bank of America Corp. strategists led by Michael Hartnett.
That concentration will remain intact until real 10-year yields — rates adjusted to reflect the true cost of funds — rise to around 3%, “or higher yields combine with higher credit spreads to threaten recession,” they wrote. Elevated bond yields adjusted for inflation, seen as a proxy for tight financial conditions, are a common way for stock-market bubbles to burst.
Equities are also ending the week on a positive note after solid results from Microsoft and Alphabet bolstered optimism on the outlook for artificial intelligence — one of the main engines of the bull market.
There are quite a few reasons to remain positive on the tech sector, according to Solita Marcelli at UBS Global Wealth Management.
Among those, says accelerating capital spending on AI is paying off, boosting earnings. There’s also the fact that cash flow generation is improving, allowing big tech to sustain investment in innovations such as AI — while also buying back shares. And finally, she believes that valuations do not look demanding.
“With tech fundamentals staying robust, in particular from big tech in the first quarter, we continue to highlight the recent correction has provided interesting entry points for tech and AI-related stocks.” Marcelli concluded.
This article was provided by Bloomberg News.