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Market Recap – March 4, 2024

Keel Point

March 4, 2024

Last week’s big news is that January’s Personal Consumption Expenditures (“PCE”) core inflation — the Fed’s preferred inflation metric – was higher than trend, but without having any negative impact on equity markets.

  • January PCE core inflation bumped up to a six-month annualized rate of 2.5% after trending below 2%, while the 12-month inflation rate dropped to 2.8%. This fed growing expectations that the Fed will delay its first rate cut until June.  Fed funds futures now are seeing only 80 basis points of rate cuts in 2024 which is ½ of what was expected only six weeks ago.
  • Stock prices rallied anyways on positive earnings news, closing Friday at new record highs for the Nasdaq and the S&P 500, with the S&P up 0.82% for the week and up 8.31% year-to date last Friday. The S&P’s weekly gains contributed to 16 out of the last 18 weeks of gains.
  • The important point here is that the U.S. Bond market is pricing out of 3-4 rate cuts without any negative impact on US equities which reflects the strength of earnings growth on equity prices.
  • The stronger than expected January PCE inflation is mainly reflecting a jump in “owners’ equivalent rent,” which we indicated last week is what homeowner would expect to get from renting out their homes, even as new lease rates for rental properties are declining.
  • Meanwhile, as core PCE is declining, the U.S. real economy remains strong, with 2024-Q1 GDP growth trending at 2.4% (annualized rate).

Productivity growth is contributing to positive economic growth and declining inflation.

  • U.S. Labor Department reports productivity growth annualizing at 4% in the second half of 2023, and the San Francisco Federal Reserve found that total factor productivity growth, which includes the impact of capital expenditures as well as labor, was 5% in the most recent quarter.
  • General purpose technology changes help drive productivity growth. Wired Magazine points out three principal contributors for the remainder of this decade:  generative artificial intelligence; clean energy (solar panels, electric cars, possible clean fusion energy); and bioengineering that could transform healthcare and create whole new industries like synthetic biology.

What to watch for this week:  February new jobs report on Friday, which likely will remain strong in the range of 250,000 gains – after January’s 353,000 job gains surge — along with a weaker rise in average hourly earnings.  Both will provide a positive outlook for GDP growth and lower inflation.

Disclosure:  Securities offered through Keel Point Capital, LLC, Member FINRA and SIPC.  Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC, an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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