Hope all is well with you. Except for a modest rally on Thursday, the major U.S. stock indexes traded in a narrow range for the second week in a row. The S&P 500 and the Dow both added around 1% to record their fourth positive week out of the past five and the NASDAQ generated a fractional gain. The new season of Succession is out and in case you haven’t watched last week’s episode, I won’t spoil it but I have broken down this week’s update using quotes from the show’s patriarch, Logan Roy.
The market is expecting inflation to moderate and become less of an issue and for the Fed to pause. The market, like those who bet against Logan Roy, continues to be wrong. On the surface this week’s inflation number fits the market’s theory. The U.S. Consumer Price Index fell to a 5.0% annual rate in March from 6.0% the previous month. That brought headline inflation to the lowest level in nearly two years. Looking back, two years ago, inflation was 2.6%, which was slightly above pre-pandemic rates. Consumer prices quickly rose to a four-decade high, with CPI reaching a peak of 9.1% last June largely because of oil prices. So to be back to 5 % is good but still not where we need to be. The CPI number was driven in large part by a drop in oil and food prices Gasoline prices were down 4.7% in March versus February and grocery costs also declined due to an 11% month-on-month drop in egg prices. Unfortunately, for markets that’s not what the Fed pays attention to. They look at core inflation, which excludes volatile energy and food costs. It is the more structural measure of inflation. Core inflation rose by an expected 0.4% versus the prior month, putting inflation at a 5.6% annual rate. It’s still down from last September’s peak of 6.6%, but still a long way from the Fed’s 2% long-term target.
What banking crisis? JP Morgan kicked off earnings season with a bang posting 12.6 billion dollars of profit, up 52% year over year. There has not been much spillover from the collapse of Silicon Valley bank. Each of the four major U.S. banks that reported first-quarter results on Friday posted earnings gains relative to the same period a year earlier. The emergency lending program from the Fed has worked exactly the way it was envisioned to. While it looked very bleak a month ago it seems like the Fed handled this potential banking crisis perfectly. For the third week in a row, U.S. banks reduced their borrowing from the emergency lending program that the U.S. Federal Reserve established. Lending through the Bank Term Funding Program dropped to about $312 billion, down about 3% from the previous week. A large-scale credit contagion is unlikely and the fear in the financial sector has subsided.
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