Thursday, 3/28/2024 p.m.

  • Stocks edge higher to close out a strong quarter: Equities closed slightly higher, sending the S&P 500 to a fresh record high and its best first-quarter gain in five years. There were no major headlines spurring the day's action, with markets continuing to focus on the broader health of the labor market and trends in inflation. To that end, it was not surprising to see markets tread some water Thursday in anticipation of the important PCE inflation report due out on Friday. Looking across markets, global equities were generally higher, as were gold and oil prices. Interest rates ticked up slightly, with the 10-year Treasury yield at 4.2%, a level around which yields have been hovering lately, as markets have, in our view, come to grips with the likelihood that the Fed probably won't begin cutting rates until the summer at the earliest.*
  • Labor market remains in good shape: This week's report on initial jobless claims showed that new claims fell to 210,000, the second-lowest reading since early January.* Continuing claims rose modestly, having trended higher over the last year but still consistent with a healthy jobs market. The low initial claims tell us that there is not yet a wave of layoffs that threatens to push the unemployment rate meaningfully higher in the near term. At the same time, the gradual move higher in continuing claims signals to us that it's getting slightly more challenging for those workers on the sidelines to find new jobs. The labor market remains tight, with low unemployment and ongoing monthly job growth, but we expect some softness to emerge as we progress through the year. We doubt the employment picture will deteriorate to the point where consumer-spending growth dries up, but recent announcements from notable retailers indicate that some softness is emerging within discretionary purchases. This is consistent with our view that GDP growth will slow this year but should remain in positive territory, as manufacturing and business investment perk up alongside some resilience in household consumption.
  • Markets looking to new inflation data: While the consumer price index (CPI) gets most of the headlines, the Fed's preferred measure of inflation is the personal consumption expenditures (PCE) reading, which is due out on Friday. CPI readings have come in hotter than expected in the last two months, so markets will be particularly interested in the PCE trend, which could set the tone for upcoming Fed decisions. Consensus expectations are for core PCE (excluding food and energy) to fall versus the pace in the prior month. The Fed has been willing to ascribe some of the hotter inflation data in January to seasonal impacts, so it will be important to get confirmation that consumer price increases are resuming their path of moderation as we progress. Inflation and employment conditions are, in our view, the two most important influences on upcoming Fed rate decisions, so between tomorrow's PCE reading and next week's monthly payrolls report, markets will have a lot to digest next week. Broadly, we think both will trend in a reasonably favorable manner this year, but any disappointments from the monthly reports could serve as a catalyst for volatility, something the markets have experienced very little of so far this year.
     

Craig Fehr, CFA
Investment Strategy

*FactSet 


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