Last week seemed to encapsulate quite well the state of the markets and the economy right - the general sense that at a high level everything is just fine, yet the data reveal vulnerabilities under the surface. The February manufacturing PMI report released last week showed a disappointing decrease in activity, suggesting that the recent uptick that the markets had been betting on as a sign of a recovery might be nothing more than a headfake. In addition, the PCE “supercore” inflation rate, which looks at core services minus housing, made its biggest monthly jump since early 2022. It’s this tug-of-war between hawkish and dovish data that’s likely to persist well into this year and raise questions around which direction Powell and the Fed will take - “higher for longer” or “lower but slower”. The fact that the rise in supercore PCE confirmed what we saw recently with the increases in both PPI and CPI could make it tough for the Fed to follow through on its “three cuts in 2024” forecast from December. The markets have already undone their expectations for a half dozen cuts and Powell might suggest later this month that even three might be optimistic given the latest inflation numbers.
The markets didn’t really do anything last week to dispel the notion that the bulls are in charge, but it’s still not a high conviction market, at least according to my signals. Small-caps are stabilizing relative to large-caps, which is a positive sign that market breadth is actually improving beyond just tech stocks, but I’d also note that long-term Treasury yields are falling again, while gold is making a push to a new all-time high. Once again, it’s really more of a collection of mixed signals versus an unquestioned risk-on sentiment and I still get the sense that the first half of March could be a key turning point for the markets.
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