Resurgent inflation worries investors, likely pushes Fed cuts further out

MANHATTAN (CN) — Investors, who started out the year with a bullish mentality, have turned sour recently in the face of sticky inflation, as markets reacted to a pair of inflation reports.

Taking a few dips and rebounds throughout week, the Dow Jones Industrial Average landed seven points down since last Friday, while the S&P 500 dropped five points for the week and the Nasdaq declined 112 points.

“The ingredients for a serious bear market are not in place, but the rise in speculative fever increases the odds of at least a modest correction that could present better buying opportunities,” wrote James Meyer at Tower Bridge Advisors.

Meyer also noted that “the threat of recession hasn’t completely disappeared” and that the Federal Reserve has work to do to keep the economy humming and reduce inflation.

“While it is clear the Fed’s policies to reduce inflation are working, it is clear that there are ongoing hot spots,” he wrote.

On Thursday, the Bureau of Labor Statistics released its producer price index, which was distressingly higher than expected. The 0.6% increase in prices last month was the highest it has been since last August, causing markets to dip downwards and Treasury yields to go higher.

Among the notable price increases was energy, which had dropped over the last few months but rose by 4.4% in February compared with the four consecutive months of decreases. However, service prices increased at a slower pace than in January, with an uptick of just 0.3%.

Earlier in the week, the BLS released its monthly consumer price index. It showed a 0.4% increase in inflation — the second straight month of such a gain, and slightly more than anticipated. Inflation is up 3.2% for the past 12 months, while core inflation is 3.8% over that same period.

Paul Ashworth, chief North America economist at Capital Economics, wrote in an investor’s note that “we still believe there is plenty of disinflationary pressure to feed through."

"We expect the Fed to begin cutting interest rates in June," he added.

The Fed meets next month to discuss interest rates. Virtually nobody expects it to do anything but keep rates in the 5.25% to 5.5% range.

Some still fret about the Fed becoming dovish too soon. “For all the talk of rate cuts and Jay Powell himself saying they don’t need to wait until inflation gets back to 2% to start cutting, it’s amazing to me how everyone has forgotten the lessons of the 1970s,” Peter Boockvar, chief investment officer at Bleakley Advisory Services, wrote in a note on Tuesday. “As inflation fell notably then, the Fed got complacent and inflation spiked anew.”

Consumer sentiment also took a dive this week, with a dip in expectations in the University of Michigan’s preliminary monthly survey. The National Federation of Independent Business also noted a decline.

In the case of the latter, the 89.4 reading in February marks the 26th consecutive month below the organization’s 50-year average of 98 points — though about one-third of respondents reporting job openings they could not fill, the lowest reading since January 2021.

“While inflation pressures have eased since peaking in 2021, small business owners are still managing the elevated costs of higher prices and interest rates,” NFIB Chief Economist Bill Dunkelberg said in a statement. “The labor market has also eased slightly as small business owners are having an easier time attracting and retaining employees.”

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