Stock market bullishness unchanged after U.S. inflation data released

(Bloomberg) - A cooling in the Federal Reserve's preferred gauge of underlying inflation last month, coupled with a rebound in household spending, failed to alter the Wall Street consensus that has sent stocks to record highs in the first quarter.

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The so-called core CPE price index, which excludes the more volatile food and energy components, rose 0.3% from the previous month, moderating from January's surprisingly strong reading.

These data, released during the Good Friday holiday break, are consistent with the view that although inflation has cooled, it remains stubbornly higher than the Fed would like, limiting the room for rate cuts this year. At the same time, they reassure strategists that the economy continues to hold up well after the Fed's rate hiking campaign of the past two years.

"Bottom line: Interactive Brokers chief simulation strategist Steve Sosnick resonance (Steve Sosnick) said: "In a word: I think this will not change the Fed or the market's current view.

Swap traders on Thursday slightly lowered their bets that the Federal Reserve will cut interest rates as soon as June, an expectation reinforced by the Fed's latest comments. On Wednesday, Fed Governor Christopher Waller said there was no rush to cut rates, emphasizing that recent economic data suggested there were reasons to delay or reduce the number of rate cuts this year.

Fed chief Jerome Powell said Friday's data matched his expectations, while admitting that the latest figures were not as good as last year.

"Speaking at a San Francisco Fed event after the data were released, Powell said, "It's nice to see that some of the numbers are in line with expectations." The February data were lower, but not as low as most of the good readings in the second half of last year; but certainly more in line with what we would have liked to see."

The data comes on the heels of a stock market surge this quarter, as investors have been betting on the Fed to deliver a soft landing for the economy. In the first three months, the benchmark S&P 500 index has risen 10%, a record 22 times this year, adding $4 trillion to the value of U.S. equities. This rapid upward trend has some worried that the market will get too hot. On Friday, the yield on the two-year bond, which is more sensitive to Fed policy expectations, rose five basis points to 4.62%.

A worrisome part of Friday's report is the mismatch between spending and revenues, Sosny resonates. While higher spending will boost the economy in the short term, higher spending and lower incomes are not sustainable. Real personal spending rose 0.41 TP3T last month, higher than the 0.11 TP3T expected.

After the holiday, the U.S. stock market and bond futures will open as usual at 6 p.m. New York time on Sunday.

Here's what others on Wall Street are saying:

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors:

This is a mixed report, so I wouldn't expect it to meaningfully change views on inflation or the Fed. It remains the case that the steady slowdown in inflation has stalled above the Fed's desired level, and there is a real possibility that inflation could move higher if economic growth continues to gain momentum, or even just maintains the strong momentum it has been enjoying. That would put us on the road to no rate cuts, and possibly even a rate hike.

Marvin Loh, Senior Macro Strategist, State Street Global Markets:

Inflation readings look consistent. The Fed has already taken these figures into account with the CPI and PPI during their meeting last week. The Supercore looks like it will clearly surprise on the downside, which would make a June rate cut possible. In total, these figures are not low enough to convince the Fed that the 2% target will be easily achieved, but the threshold for starting the normalization process this summer is low.

Chris Low, Matteo Economist, FHN Financial

This underscores the caution recently expressed by Fed Governor Dr. Chris Waller and others. They still expect a rate cut this year, but in Waller's words, "there's no rush," especially with real consumer spending at its strongest since December.

Zachary Hill, Carbonite Manager at Horizon Investments:

The data does not change the outlook for monetary policy. But it does reinforce the patient stance recently put forward by the more hawkish members of the Fed. It further reinforces the notion that interest rates will be guided by changes in new data rather than economic forecasts.

Jeffrey Roach, LPL Financial Premier Mat Economist:

The trajectory of consumer spending is weakening, particularly as real disposable income fell in February. Core service inflation is slowing and is likely to continue throughout the year. By the time the Fed meets in June, these data should be sufficient for them to begin the rate normalization process. But as things stand, markets need to show the same patience as the Fed.

Jay Hatfield, Chief Executive Officer, Infrastructure Capital Advisors, Inc:

Monday's release may be slightly positive for the market, but the PCE can basically be extrapolated from the CPI/PPI. More importantly, the French CPI released this morning came in at 0.3% vs. 0.6% expected and 2.3% y/y from 3%, confirming our view that the ECB will cut rates in June, with the Fed lagging behind in July, as housing continues to be a significant overestimation of rentals over the next few months. PCE will continue to be slightly warmer as the housing sector continues to overestimate rents sharply in the coming months due to inflation.

-Written with the help of Elena Popina and Rita Nazareth.

(Updates to comments by Fed matron Jerome Powell in the sixth and seventh paragraphs).

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