Markets

The S&P 500 increased on Thursday, recording its best first-quarter performance in five years, despite a retraction on rate cuts from one of the most potent Fed members, Christopher Waller, and what was expected to be cautious trading sentiment ahead of crucial US inflation data released later on Friday.

A crucial gauge of US consumer confidence, issued on Thursday and revealing a noteworthy and unexpected rise in the final reading for March, helped to boost the markets.

This month, the University of Michigan’s index had a revised headline value of 79.4, higher than the earlier publication of 76.5. Forecasts in consensus had predicted no variation from the initial value.

Predicting economic data as the US election draws near is becoming increasingly more accessible. For market players and policymakers, the contradiction between solid GDP growth, low unemployment rates, and muted economic assessments is a recurring concern.

However, regarding consumer inflation, the statement on Thursday had downward revisions at both horizons. The original 3% forecast for the year ahead was changed to 2.9%, and the 2.8% forecast for the five- to ten-year period was changed from 2.9%. Put differently, consumers genuinely believe that inflation has reversed course.

Furthermore, the Michigan sentiment report may be seen favorably by stock market operators as adhering to the Goldilocks story. The head of the survey, Joanne Hsu, noted that people were now less uncertain about inflation, saying, “Consumers are now broadly in agreement that inflation will continue to slow both over the short-term and the long-term.”

Stocks are predicted to stay appealing to investors in such a setting, with purchasing activity continuing during brief market pullbacks or falls. As long as the overall economic balance is positive, this sentiment reflects a preference for stability and modest growth, which keeps the Fed on track and encourages continuing bullishness in the equity market.

 

One key factor supporting risk assets is the asymmetry in the central bank’s decision calculus, where the bar for rate hikes is high, and the threshold for a rate reduction is minor. This relationship implies that the central bank is more likely to offer monetary support when faced with economic difficulties. The strong US consumer also enables the Fed to buy some time for inflation to decrease.

The equity bear argument is becoming more and more akin to a cartoon script, with nebulous and nearly intangible risks.

For example, Dubravko Lakos-Bujas of JPMorgan warned clients during a recent web event that the market may turn bearish “one day out of the blue.”

Naturally, the most significant market fluctuations occur when we are unprepared for and don’t see them coming. Still, a bizarre meltdown hypnosis like this doesn’t advance the story, especially given that Bloomberg called it “The Talk Of The Stock Market.” Yes, that was the buzz of the market, but in a lighthearted way.

With extraordinary momentum, the US stock market began in 2024 and bears now stand before a steamroller. Resurgent economic confidence, the possibility of interest rate reductions, and the lure of prospects in the rapidly developing field of artificial intelligence are some of the causes driving this surge.

Currency Exchanges

Will the Fed be the last to announce a rate cut?

Over the past 48 hours, Christopher Waller’s mildly hawkish speech has strengthened the currency and given markets a hint that the Federal Reserve may postpone cutting interest rates. In the currency markets, the dollar has benefited from this trend.

Waller’s recent speech to the Economic Club of New York highlighted the Fed’s systematic and careful strategy. His lecture, “There’s Still No Rush,” mirrored ideas from a speech he gave in February, headlined “What’s The Rush?” Waller expressed concern with recent US CPI announcements in his most recent remark, highlighting the necessity to consistently improve inflation data over the coming months before considering rate decreases.

 

Consider the timing of this cautious approach, even though it might be seen as a little hawkish given that June is still three months away in March. “At least a couple” implies a two- to three-month timeframe, which preserves the potential for rate reduction in June by market expectations. Additionally, this aligns with predictions of rate reduction from the Bank of England in August and the European Central Bank in June.

On the other hand, FX traders believe that the Fed will be a latecomer to the rate-cutting game.

Oil Markets

After rising off support levels earlier in the week, the oil markets saw a bullish trend in the final session of the first quarter, propelled by encouraging macroeconomic data.

The US consumer’s resilience has continuously exceeded market expectations, even in the face of the Federal Reserve’s tightening monetary policies. The US consumer has shown resilience despite early worries about a recession at the start of the central bank’s rate-hiking cycle. Despite a slight slowdown from a robust 4.9% growth rate in the third quarter of 2023, the Federal Reserve Bank of Atlanta’s GDPNow model predicts 2.1% growth in the first quarter of the current year.