April 29, 2024
Good morning,
You could hear the collective sigh of relief in most markets Friday morning as the PCE Price Index (Personal Consumption Expenditures) increased +0.3% in March, about the same as February, and matching the consensus estimate (most importantly). It was an all-clear sign, early Friday morning, for equities to price in Microsoft (MSFT) and Alphabet’s (GOOG) earnings beats reported Thursday night after the market close. The S&P 500 Index (SPX) jumped +1.02% on the day Friday and ended the highly volatile week +2.67%. Just to highlight that volatility, the SPX was down -1.35% on the week, mid-day Thursday following the GDP report. Yes, you can add the absolute values of those two numbers to get an approximate move of over 4% in 24 hours. Although the VIX declined from 18 to 15 this week (a big move for the volatility index), I doubt we’ve seen the end of volatile trading sessions for a while.
Regarding that PCE report, income and consumer spending did rise in March, reflecting the underlying resilience of the economy. But it also kept inflation sticky, confirming a delay in Fed rate cuts. How timely, since there is a Fed meeting this week with the all-important comments and Q&A beginning Wednesday afternoon (~2pm EDT). The Fed will likely highlight the restrictive nature of current rate levels, and in so doing, push back on talk of rate hikes. Their narrative may then turn to higher rates for longer – something markets have been pricing in over the past month.
Longer term, beyond the purview of the technical indicators (6-8mo), I don’t see how higher for longer rates does not increase the odds of a recession and dash the hopes of a soft landing. Shorter term, the technicals are healthy and currently reflecting that we are in a correction in the context of an ongoing cyclical bull market. And just to remove any ambiguity, bull market means higher highs on the other side of the correction.
Be well,
Mike
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