Markets keep losing as inflation continues to take its toll

MANHATTAN (CN) — Most of the gains Wall Street has seen for the year have been wiped out in the last several days, as investors keep pushing out their forecast on when interest rate cuts will come.

For the past six days the Nasdaq has suffered losing days, closing out the week down 893 points. The S&P 500 lost 156 points for the week, while the Dow Jones Industrial Average managed to add three points to its index.

Some experts say the recent pullback is due to sticky inflation and recent hawkish comments by Federal Reserve members, though the increasing tensions between Israel and Iran also has investors on edge.

“It’s not because fundamentals have deteriorated materially,” wrote Tom Essaye of the Sevens Report in an investor’s note. “Instead, it’s because the news and data suddenly stopped fueling unrealistic rate cut and falling inflation expectations, and as such, this market has had to come back to Earth.”

The strike by Israel on Iranian military targets didn’t help Wall Street find better footing, though experts say the situation is not yet dire from an economic standpoint to have any significant impact on markets.

“The headlines on this are worrisome but we’ve always stressed that oil prices are the best way to view the market’s opinion of geopolitics,” Essaye noted. As of the closing bell on Friday, oil futures on the West Texas intermediate were at about $84, though futures were down for the week.

More concerning to Wall Street was a blend of hawkish talk and dovish data from the Federal Reserve. On Tuesday, Fed Chair Jerome Powell said during a panel discussion that recent inflationary data “have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence.”

Powell noted the unemployment rate has been below 4% for the past 26 consecutive months, something that hasn’t happened in about 50 years, but that inflation has stubbornly refused to come back down.

“That said, we think policy is well-positioned to handle the risks we face if higher inflation does persist,” he said, noting the central bank can keep interest rates steady to tamp down inflation. “Come what may, we remain strongly committed to returning inflation over time sustainably to 2%.”

Conversely this week, the Fed’s Beige Book, which catalogs economic conditions across the country, reported the U.S. economy grew “slightly,” with “modest” price increases and normalizing wage growth.

“On balance the Beige Book reads modestly dovish, but not enough to outweigh other recent data showing inflation persisting above the Fed’s target since the turn of the year,” said Bill Adams, chief economist at Comerica.

Powell’s comments and the hard data seemed at odds, though both factors accelerated the selloff on Wall Street.

“The Fed picked a bad time to have a communication problem on the path of rates this year,” said Jamie Cox, managing partner for Harris Financial Group. “The Fed has a free pass to sit on rates longer while the labor market remains strong, consumption is unaffected, and the typical consequences of hiking rates quickly aren’t apparent in the economy.”

Also thwarting the market this week were retail sales, which showed a 0.7% bump last month, well above the 0.3% median increase most analysts forecast. Real consumption growth increased 2.5% on an annualized basis, despite recent slowdowns in certain sectors.

The gains in retail throw cold water on any notion of an economic slowdown, keeping recession fears at bay but also stoking worries the Fed may now hold off on rate cuts until September.

Follow @NickRummell

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