Corporate earnings got off to a positive start, as banking giants Wells Fargo and JPMorgan Chase beat expectations. Still, discouraging retail sales data showing a slowdown in consumer spending by 1% in March pulled markets lower Friday.
US inflation expectations shocked investors as they surged by the most in nearly two years despite growing signs the US economy is cooling. Assisted by fresh hawkish commentary from policymakers, this set off the latest flip-flop in bets on policy.
It also sent bond yields and the dollar surging, with new signs that banking tensions are easing, perhaps adding some extra impetus to the moves.
The surprise helps to underscore just how damaging OPEC+’s decision to cut crude oil output may have been. Consumers were concerned about gasoline prices. Diesel continues to march lower as demand for the heavy-machinery fuel that powers everything from commercial trucking fleets to construction equipment weakens across many of the world’s largest economies.
The earlier March CPI report tells some stories which point to a slower pace of disinflation. As a result, we still expect the Fed to raise the Fed funds rate by another 25 bps in May and then maintain that posture for several months.
The energy provided a substantial but ultimately temporary drag on headline inflation, and the production cuts announced by OPEC+ set the stage for an uptick in the headline in April.
Nevertheless, the major swing factor for the outlook remains just how much tightening of financial conditions will be achieved by higher lending standards following the recent banking turmoil. If bank earnings prove resilient and banking turmoil remains contained as it seems over the past three weeks, we expect the Fed to hold at its terminal rate through year-end.
On the other hand, trader attention will turn toward an important week of quarterly earnings reports from financials from inflation, including Charles Schwab on Monday, Bank of America on Tuesday and Morgan Stanley on Wednesday. Investors have been eyeing the overall health of the sector after the collapse of Silicon Valley Bank last month spurred a liquidity crisis.
Other notable names outside the finance sector, including electric vehicle heavyweight Tesla, will report second-quarter earnings on Wednesday, while Procter & Gamble will report on Friday.
Fullerton Markets Research Team
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