This Week in Financial Markets: 2.19.2024

1. No Recession!

For first time since April 2022, BofA FMS (fund manager survey) respondents are not predicting recession. Keep in mind, the best buying opportunities come when the majority of the investment community see a recession as a certainty.

The hype around AI combined with this bullish outlook on the economy has led investors to pile into equities. Managed money is very, very long this market.

2. Inflation Rebounding?

U.S PPI (YOY) (JAN) ACTUAL: 0.9% VS 1.0% PREVIOUS; EST 0.6%

Both Producer Prices (PPI) and Consumer Prices (CPI) came in hot this past week. Inflation’s deceleration has hit a bump in the road.

- Core Inflation m/m was 0.4% vs forecast of 0.3%
- Core inflation y/y was 3.9% vs forecast of 3.7%
- Headline inflation m/m was 0.4% vs forecast of 0.2%
- Headline inflation y/y was 3.4% vs forecast of 3.1%

Price changes over last year (Jan CPI report)

Transportation: +9.5%
Shelter: +6.0%
Food away from home: +5.1%
Electricity: +3.8%
Overall CPI: +3.1%
Food at home: +1.2%
New Cars: +0.7%
Medical Care: +0.6%
Used Cars: -3.5%
Gasoline: -6.4%
Fuel Oil: -14.2%
Gas Utilities: -17.8%

The market is now no longer pricing in a rate cut for March or even May after the hot inflation data. The market is currently pricing in a 64.3% chance Jerome Powell and the Fed keep rates unchanged in May. The market now thinks the first rate cut will come in June.

For now, the hot data has only ‘pushed-out’ rate cuts, but if the trend changes to rebounding inflation (multiple months in a row) the rate cuts will start to come off the table and financial conditions will begin to tighten.