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Market Currents – 5/14/24

  • Market Momentum Faltered.  April marked the first downturn for global equities this year, with the S&P 500 falling from record highs after five consecutive months of gains.  The weakness was largely due to reduced expectations for Federal Reserve rate cuts following a series of higher-than-expected inflation reports.  This reinforced the “higher for longer” interest rate outlook, amid concerns that the Fed might not cut rates at all this year.  Additionally, ongoing tensions in the Middle East further dampened risk appetite.  US Treasury yields moved higher, and negatively affected fixed income assets. 
  • Inflation Remains Sticky.  Inflation remains a stubborn problem, with efforts to reduce it stalling in recent months.  The Consumer Price Index (CPI), which tracks economy-wide price changes, has increased for the third consecutive month, coming in hotter than most economists had forecast.  Housing and energy costs drove more than half of the monthly increase, although price increases were broadly observed.  The halting progress in combating inflation, coupled with the still robust job market, suggests that the effects from past Fed rate hikes have been slow to impact the economy. 
  • Fed Response.  The Federal Reserve voted unanimously to keep policy rates unchanged at 5.25% to 5.5%, and signaled an uncertain timing for rate cuts during its May 2024 Federal Open Market Committee (FOMC) meeting.  This marks the sixth consecutive meeting with steady rates, maintaining the highest federal funds rate in over 23 years.  With the CPI at 3.5% and still notably above the Federal Reserve’s target rate of 2%, Fed chair Jerome Powell stated that meaningful progress on inflation is needed before considering rate reduction.
  • Dovish Implications and Market Relief.  In another key decision, the Fed announced it will reduce its Quantitative Tightening (QT) program.  Previously, up to $95 billion a month in Treasuries and mortgage bonds are allowed to mature without replacement.  This will now be reduced to $60 billion.  Furthermore, Powell stated the current Fed rate is sufficiently restrictive, and suggested that the next policy move is unlikely to be a rate hike.  These measures have dovish implications, providing much-needed relief given the aggressive reset of rate and Fed expectations during the recent downturn.   
  • Market Outlook.  The market started April on a weaker note, primarily due to an unexpectedly hot inflation report, prompting investors to reassess Federal Reserve policies and leading to a rise in interest rates across all maturities.  From a technical perspective, the market was slightly overextended after a five-month continuous rally.  The recent selloff has been orderly, and may provide a healthy and necessary reset for market sentiment.  The recent FOMC meeting all but confirmed that prospects for rate cuts are now delayed.  However, the market welcomed the Fed’s dismissal of rate hike prospects, which has been a growing concern, and the reduction of the Quantitative Tightening program, both of which have dovish implications.  The current corporate quarterly earnings season is not without its shortcomings, but the overall growth rate remains healthy, and the Q2 earnings expectations have been raised.