Inflation was again the dominant theme last week, both on the consumer and producer side, but it was the market’s reaction to those figures that was interesting. On Tuesday, we saw both headline and core inflation readings in the U.S. come in hotter than expected with both recording 0.4% increases over last month. Equities didn’t really seem to care that much though and pushed higher despite that. A sharp increase in PPI later in the week, however, did shake up the markets and sent all of the major averages lower on the week with small-caps performing the worst.
Watching cyclicals, including energy, materials and financials, leading the way this week was noteworthy. I think we’re going to keep seeing the anticipated start date of the Fed rate cutting cycle continue to slowly get pushed back, but I think the markets (and probably the Fed) are still expecting cuts at some point this year. If Powell decides to cut while inflation is still creeping higher, it’s entirely possible that reflation becomes the dominant theme as we move further through 2024. As long as GDP growth remains solidly positive, this may provide a path for risk asset prices to continue moving higher in the near-term. If the unemployment rate is serving as a signal that the labor market is indeed weakening (a 0.5% increase from cycle lows, which is where we’re at now, is generally considered a recessionary warning sign), high inflation and an expected downturn in growth becomes the trigger for a broader risk-off move for risk assets.
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