Stocks continue to meander up and down without a meaningful trend. There is widespread expectation the Fed will pause its interest rate hikes at its next meeting and cut rates this summer.
Don’t count on it. With data indicating strong economic growth and stubborn inflation, the Fed is unlikely to cut interest rates in June.
The Week That Was
Friday’s April job report showed little change from the previous month. Private-sector job growth continued at a strong 2 percent annual rate, about the same rate as the past six months.
In contrast to jobs, the April index of total hours worked for production workers posted a decline at a 2 percent annual rate, and a decline at a 1.5 percent rate over the past three months. Hourly earnings for production workers continue to increase at close to a 5 percent annual rate.
Earlier in the week, April business surveys for service companies were consistent in showing an acceleration in growth, new orders, and inflation.
S&P’s survey shows a strong acceleration, while the ISM survey showed only moderate strength. Both show inflation remains a serious problem.
April surveys for manufacturing were mixed. The ISM survey shows manufacturing and new orders declining and prices increasing. S&P’s April manufacturing survey shows slight growth in the composite and new orders, with a speed-up in inflation.
Most of the data for April are consistent with continued strong economic growth. These data have the Fed of Atlanta estimating second quarter real growth at a relatively strong 2.7 percent.
Things to Come
Wednesday’s April Consumer Price Index (CPI) report is likely to show inflation remains well above the Fed’s target range. April business surveys show inflation remained strong.
Oil and gasoline prices increased by about 5 percent from March to April. Although prices have since declined, the recent declines won’t help April’s inflation numbers.
Money, Money, Money
After last week’s Fed meeting, many expect the central bank to pause its rate hikes. However, Fed Chair Jerome Powell insists the Fed remains focused on reducing inflation.
Two CPI reports are due before the Fed’s June meeting. The first arrives this Wednesday. We believe the report will show inflation is well above the Fed’s target.
Financial markets continue to anticipate a pause followed by a cut in interest rates this summer. We expect the reported strength in both the economy and inflation will lead to at least one more interest rate hike before short-term rates have peaked. We also do not expect the Fed to cut rates before year-end.
Market Forces
For five consecutive weeks now, the S&P500 has ended close to where it was a week earlier. The S&P500 has remained in the range of 3,900 to 4,200 for the entire year.
Current data show the economy continues to grow, with wage and price pressures continuing. Unless there is a sharp change in upcoming economic news, the Fed will be forced to apply more restraint, or it will lose credibility over its commitment to check inflation.
The yield on 10-year Treasury Notes remains a key indicator of the financial markets’ confidence the Fed will reach its inflation objective. With the yield remaining around 3.5 percent, financial markets are still showing confidence the Fed will succeed. Under today’s conditions, expect longer-term interest rates to remain close to current levels while the S&P500 remains in the 3,900 to 4,200 range.
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Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 12 percent
Monetary Policy: restrictive