MANHATTAN (CN) — Driven mostly by worries the Federal Reserve could further postpone interest rate cuts, markets suffered one of their worst weeks in a year.
Losses piled up midweek, though following a blockbuster jobs report on Friday markets recovered somewhat. By the closing bell on Friday the Dow Jones Industrial Average dropped 905 points, the S&P 500 declined 50 points, and the Nasdaq fell 131 points.
Tom Essaye of the Sevens Report noted in an investor’s note that stocks were “priced for perfection and vulnerable to any disappointment,” such as the resilient jobs data this week. “It’s not that the news has been ‘bad,’ it just hasn’t reinforced lofty valuations and bullish sentiment,” he wrote.
The big news of the week didn’t come until Friday, when most of the big losses already had occurred, with the Labor Department reporting the U.S. economy gained 303,000 jobs in March, more than expected. Investors already were on edge, though, due to previous economic data and hawkish sentiment from Federal Reserve members.
“The blockbuster 303,000 increase in non-farm payrolls in March supports the Fed’s position that the resilience of the economy means it can take its time with rate cuts, which might now not begin until the second half of this year,” wrote Paul Ashworth at Capital Economics.
On Thursday, Minneapolis Federal Reserve Bank President Neel Kashkari floated the idea that rate cuts could be off the table if inflation continues to remain sticky. “There’s a lot of momentum in the economy right now,” he reportedly said.
Other factors offer conflicting messages on the Fed’s next step. On Monday, the ISM Manufacturing purchasing mangers index (PMI) increased more than expected last month, going from 47.8 in February to 50.3 in March. Demand for electronic products, chemical products, and fabricated metal saw the biggest increases.
Anything above the 50-point threshold on the PMI signals growth in the manufacturing index, which is obviously good news for the industry and Wall Street alike.
Prices paid by companies also saw bigger-than-predicted increases from 48.4 to 54.6, and the production sub-index’s increase from 52.5. to 55.8. Both are the strongest the sub-indices have been since mid-2022.
“The economy is growing solidly this spring,” said Bill Adams, chief economist at Comerica, noting that manufacturing has been a nice offset to slowing consumer spending in 2024.
“Higher prices of energy and agricultural products will likely keep inflation running on the hot side in March,” he continued, “but core measures of inflation should cool on slower increases of shelter costs, new and used car prices, and potentially of prices of other durable consumer goods as well.”
However, midweek the decline in the ISM Services index supported slowing growth, as the headline number dropped from 52.6 to 51.4, well below the consensus forecast. Analysts are not terribly concerned with the fall, though.
“While the [ISM] surveys have understated economic conditions in recent times, the gloomy message at least provides some support to our estimate that GDP growth slowed to 2.3% in the first quarter, from 3% in the fourth quarter,” Stephen Brown, deputy chief North America economist at Capital Economics, wrote in an investor’s note.
Underscoring the message to relax, Federal Reserve Chair Jerome Powell said in a speech this week that recent inflation and economic reports “do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.”
Powell reiterated the central bank plans to cut rates “at some point this year” but that “given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decision on policy.”
Earlier in the week, the U.S. Chamber of Commerce released its small business index, which showed small business owners’ confidence has ticked up. More than half of respondents still say inflation is their biggest challenge, and one in three owners say the U.S. economy is in good health, seven percentage points higher from last quarter’s survey.
“Small businesses’ perceptions of the economy are drifting upward, with businesses reporting being comfortable with their cash flow and the health of their business,” Tom Sullivan, vice president of small business policy at the chamber, said in a statement. “While headwinds remain, confidence is ticking upward and small businesses are more resilient and prepared for unforeseen challenges.”
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Markets keep losing as inflation continues to take its toll April 19, 2024