Week in Review: April 12, 2024

April 15, 2024

Recap & Commentary

Markets ended the week lower as investors fretted about the impact continued strong inflation might have on future Fed rate cuts, and heightened tensions in the Middle East. After beginning the year pricing in six rate cuts, markets are now expecting just two. In a sign of how quickly expectations can change, a week ago markets were assigning just a 15% probability of the Fed making just one or no rate cuts in 2024.  By the end of the week, those odds had increased to 40%. At the same time, the odds of a June rate cut tumbled from 50% to as low as 20%, before ending the week closer to 30%. A month ago, those odds stood above 60%. Should markets continue to price in reduced odds of rate cuts in 2024, it would likely act as a headwind to both equity and fixed-income markets.

Interest rates reflected the reduced odds of rate cuts in 2024 with the 10-Year Treasury yield gaining 0.12% to end the week at 4.52%  At the shorter end of the yield curve, the 2-Year Treasury rose 0.14% to end at 4.89%.  Housing which had benefitted from a decline in mortgage rate to start the year, saw the 30-year mortgage rate move up to 6.9%. Though still well below the peak of 7.8% in late October, rates are up ~0.3% from their recent lows in January. How that affects home sales during the all-important Spring season remains to be seen.

Economic Commentary

Consumer prices (CPI) rose 0.4% in March, above the expected 0.3% increase.  Compared to a year ago, prices accelerated from 3.2% in February, to 3.5%.  Energy and food prices increased 1.1% and 0.1%, respectively.  Core CPI, which excludes those measures, also rose 0.4% for the third consecutive month, vs. expectations for a 0.3% increase. Core prices remained at 3.8% compared to last year. The shelter index increased 0.4% for the second consecutive month and was responsible for over 60% of the rise in Core CPI. Shelter costs have increased 5.7% since last year.

The Fed has prioritized a subset of core inflation known as “Super Core” that removes the impact of shelter costs to better measure the service prices that consumers pay. The Fed believes services sector pricing is most influenced by domestic labor costs which can in theory be influenced by adjustments to the Fed funds rate. Super core inflation peaked in September 2022 at a 6.5% annual rate. The measure ended last year at 3.9%, but reversed course in 1Q24 re-accelerating to a 4.8% rate in March. The rapid pace of the acceleration will continue to raise questions around the timing and amount of rate cuts this year.

On the producer side, PPI inflation was more subdued, rising 0.2% in March vs. expectations for a 0.3% increase, and fell meaningfully from February’s 0.6% reading. Year over year, PPI rose 2.1%.  The monthly increase was driven by final demand services prices, which rose 0.3%.  Goods prices slightly declined by 0.1% during the month. Further back in the supply chain prices declined during the month, with input prices for processed and unprocessed goods falling by 0.5% and 1.9%, respectively.

Of Note

Over the weekend Iran attacked Israel with hundreds of drones as well as ballistic missiles. The attack marked the first time Iran has directly attacked Israel and a major escalation of fighting in the Middle East that began following Hamas’ attack on Israel in October. Should Iran attempt to close the Straits of Hormuz it would have an immediate impact on global energy prices.

Market Indices   (As of 04/12/2024)

The Week Ahead

• Housing Starts
• Existing Home Sales
• Retail Sales
• Industrial Production
• Weekly Jobless Claims