U.S. Inflation Cooling Raised Hopes for Soft Landing and Peak Terminal Rates

Barry Adams
28 Apr, 2023
New York City

Market rally broadened beyond tech stocks on the third day of advance after the inflation index cooled, lifting hopes of the arrival of peak terminal rates. 

Stocks advanced for the third day in a row after the latest economic data highlighted challenges faced by the Federal Reserve but also lifted hopes that the Fed may not have to continue to keep raising rates. 

A closely watched alternative measure of inflation, which generally understates inflation felt by urban residents, rose 4.6% on an annual basis and advanced 0.3% from the previous month in March. 

Prices paid by consumers are rising at a slower pace, largely reflecting the deceleration in gasoline prices at the pump stations and cheaper commodities.  But that is not the case for services. 

The headline inflation measure has been steadily declining for several months but the core rate of inflation has been stuck near 4.6%, indicating that the inflationary forces are now well entrenched in the economy. 

The elevated level of inflation after several interest rate hikes shows how difficult it will be for the Fed to bring down inflation to its preferred level of 2% without the help of base effect. 

Elevated inflation report came a day later when the data indicated a slight increase in GDP in the first quarter, showing the difficult task of keeping the economy humming while arresting inflationary forces.  

Market participants are anticipating the Federal Reserve to lift interest rate by 25 basis points after the policy meeting next week, but investors are anxiously awaiting the Fed's explanation of how long high interest rates  have to be kept to bring down inflation closer to 2%.  

Some investors are hoping that the Fed may be done raising rates after one more increase next week, and few are hoping that rates may begin to go down towards the year's end or early 2024. 

 

March Personal Spending Flat, PCE Inflation Eased

Personal income rose slightly in March and personal spending was unchanged, the Commerce Department report  showed Friday. 

Personal income increased 0.3% in March, matching the rate in February and personal spending was unchanged in the month after edging up a revised 0.1% in February. 

The report also included a measure of consumer price inflation, that generally understates urban inflation, but preferred by policymakers at the Federal Reserve. 

The personal consumption expenditure price index increased 0.1% from the previous month in March, easing from a 0.3% advance in February.

The PCE inflation was the smallest since July 2022 and core PCE, which excludes food and energy, rose 0.3% and matched the rate in the previous month. 

The annual rate of consumer price growth eased to 4.2% in March from a revised 5.1% in February and annual core PCE rate slowed to 4.6% from 4.7% respectively. 

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.5% to 4,155.13 and the Nasdaq Composite index gained 0.4% to 12,185.58. 

For the week, the S&P 500 index advanced 0.4% and the Nasdaq Composite gained 0.9%. 

The yield on 2-year Treasury notes inched lower to 4.06%, 10-year Treasury notes rose to 3.45% and 30-year Treasury bonds held at 3.68%. 

Crude oil rose 46 cents to $75.23 a barrel and natural gas prices eased a fraction to $2.35 a thermal unit. 

 

U.S. Stock Movers 

Intel Corporation soared 6.9% to $31.91 after the advanced semiconductor chipmaker reported smaller-than-expected quarterly loss. 

Amazon.com, Inc declined 3.8% to $105.68 after the online retail platform operator reported weaker-than-expected revenue growth in its cloud services segment. 

Capital One Financial Corp declined 1.5% to $94.47 after the credit card company reported first quarter earnings that were sharply lower than analyst estimates. 

Exxon Mobil Corp rose 1.8% to $119.0 after the oil company reported record first quarter profit, driven by higher output. 

Chevron Corporation declined 1% to $165.43 after the oil company reported higher first quarter profit despite the decline in oil and natural gas prices. 

 

European Markets Trim Weekly Losses, Euro Area Economy Barely Grows 

Major averages in Europe turned lower after investors reviewed the latest corporate results and economic data. 

Caution prevailed in the final trading day of the week, after economic growth in the eurozone was a meager 0.1% and the German economy registered flat growth after higher interest rates and elevated inflation hit the aggregate demand. 

On the earning front, companies reported mixed quarterly results. Mercedes Benz lifted its outlook for its vans division but Swedish appliance maker Electrolux reported weak demand. 

Danske Bank posted a sharp increase in first quarter profit and NatWest reported higher profit but the the U.K.-based Amundi reported a decline in assets under management.  

 

Euro Area Registered Weak Q1 Economic Growth 

Economic growth in the Euro Area in the first quarter was 0.1%, according to the preliminary data released by the Eurostat, the statistical office of the European Union. 

GDP expanded 0.1% from the previous quarter in the currency union and rose 0.2% in the wider European Union. 

From a year ago, seasonally adjusted GDP increased 1.3% in both the  euro area and the EU in the first quarter of 2023, after a rise of 1.8% in the euro area and 1.7% in the EU in the fourth quarter of 2022. 

Among the member states, economic growth from the previous quarter in Germany was flat, in France 0.2% and Spain and Italy 0.5% 

Portugal led the region with a rise of 1.6% and the Irish economy registered the largest decline of 2.7%.

 

Spain and French Inflation Rates Accelerated 

Inflation rate in France unexpectedly accelerated in April to 5.9% from 5.7% in March, according to the data released by the statistical office INSEE on Friday. 

Inflation accelerated following the faster rise in energy prices of 7% in April compared to 4.9% in March and services at 3.2% from 2.9%. 

On a monthly basis, the consumer price inflation rose 0.6% following a 0.9% gain in March. 

The harmonized inflation index increased 0.7% on a monthly basis and rose 6.9% from a year ago. 

Consumer price index in Spain accelerated to 4.1% in April from an 18-month low of 3.3% in March, the National Statistics Institute INE reported Friday. 

The electricity prices declined at a slower pace and fuel prices rebounded in April, offset by a smaller rise in food and alcohol beverages.   

Core rate of inflation, which excludes energy and food prices, weakened to 6.6% from 7.5% in March. 

On a monthly basis, consumer prices rose 0.4% in April, matching the rate in the previous month. 

 

Europe Indexes & Yields 

The DAX index increased 0.8% to 15,922.38, the CAC-40 index increased 0.1% to 7,491.50 and the FTSE 100 index added 0.5% to 7,807.57. 

For the week, the DAX index increased 0.4%, the CAC-40 index dropped 1.8% and the FTSE 100 index declined 0.6%. 

The yield on 10-year German Bunds eased to 2.38%, French bonds to 2.96%, the UK gilts to 3.73% and Italian bonds to 4.28%.

The euro hovered near a one-year high against the dollar as the U.S. economy faced banking turmoil. 

The euro edged higher to $1.093, the British pound to $1.246 and the Swiss franc to 89.53 cents.

Brent crude rose 19 cents to $78.41 a barrel and the Dutch TTF natural gas increased 83 cents to €39.89 per MWh.

 

Europe Stock Movers 

Electrolux AB increased 7.8% to SEK 144,30 after the Swedish appliance maker posted a smaller-than-expected loss. 

Revenue in the first quarter rose 9% to  SEK 32.73 billion from SEK 30.12 billion, and organic sales rose 2.2%. 

The company maintained higher prices but sales volume declined in the quarter. 

Loss in the first quarter was SEK 588 million compared to a profit of 950 million and diluted earnings per share was (SEK 2.18) compared to SEK 3.14 a year ago.  

Eni SpA declined 0.7% to €13.40 after net income in the first quarter declined 11% from a year ago on lower oil and natural gas prices. 

Covestro AG soared 6.4% to €39.02 after the German chemical company said it plans to resume its previously announced stock repurchase program.  

NatWest Group Plc declined 4.5% to 260.0 pence after the UK-based bank reported weaker-than-expected outlook. 

Pearson Plc rose 3.3% to 882.80 pence after the U.K.-based publishing company reported quarterly results and announced its plan to commence a stock repurchase program in the second-half of 2023.  

Mercedes Benz Group AG declined 1% to €69.37 after the vehicle maker reported a 12% rise in its first quarter profit. 

Moreover, the luxury vehicle maker warned that recent turmoil in the banking sector in the U.S. and Europe may negatively impact future sales.