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U.S. stocks up amid inflation and Fed outlook

US stock, finance, financial news

In the United States, stock indexes have shown resilience, managing to gain value despite facing adverse economic data, particularly concerning inflation. This suggests a disconnect between market movements and traditional economic indicators. The U.S. dollar, on the other hand, saw an appreciation in value, indicating a stronger position in the global currency market.

Concurrently, gold, often viewed as a safe-haven asset, experienced a reduction in its valuation. This could be indicative of investors' shifting confidence or a response to broader market dynamics. Additionally, the yields on U.S. bonds witnessed a rise, observable at both the short and long ends of the yield curve.

This rise in bond yields often reflects investor expectations about future interest rates and inflation. The day prior, there was a noticeable increase in concerns regarding the Consumer Price Index (CPI), specifically about its rate of decrease not aligning with the Federal Reserve's (Fed) targets.

A month prior, there was a significant spike in consumer prices within the U.S., particularly noticeable in January. This was evident when looking at the core inflation index, which excludes the often volatile prices of energy and food. This unexpected rise led to a wave of skepticism among investors, casting doubt on whether inflation would decline swiftly to meet the targets set by the central bank.

Given this backdrop, there was an anticipation that the inflation data for February would provide clarity on whether the earlier spike in prices was a temporary anomaly or if it indicated a more persistent issue with declining inflation.

In the U.S., the rate of increase in consumer prices during February aligned with market expectations, showing a 0.4% rise compared to the previous month. This rise brought the year-over-year inflation rate from 3.1% to 3.2%.

However, the core index, which is considered more indicative of underlying inflation trends as it excludes the volatile sectors of energy and food, also showed a 0.4% increase on a month-to-month basis, slightly surpassing the general market consensus. When evaluated on a year-over-year basis, this core index showed a slight decrease, moving from 3.9% to 3.8%. These figures are closely watched as they provide insights into the underlying inflationary pressures in the economy, excluding the more volatile sectors.

The service sector continues to be a significant driver of price inflation, indicating that the sector is still facing upward cost pressures. In the latest report, service prices have increased by 0.5%, which is reflective of the notable rise in wages. This could be indicative of a tighter labor market or increased labor costs being passed on to consumers.

In the previous month, the price increase in goods had partially offset this rise, but in the current report, the increase was only 0.1%. The overall Consumer Price Index (CPI) was pushed higher, primarily due to the increase in fuel prices, which have a widespread impact on various sectors of the economy. Additionally, airfare prices have also seen an increase.

A positive note for the Federal Reserve, however, is the observed decrease in the 'supercore' inflation, which excludes not only food and energy but also the shelter category, suggesting some areas of the economy may be experiencing lower inflationary pressures.

Following the release of the latest economic data, there was no significant shift in the market's expectations regarding the future trajectory of interest rates in the U.S. The market consensus still suggests a slightly more than 60% likelihood that the Federal Reserve will commence a cycle of rate cuts starting in June. These market expectations are closely aligned with the projections made in December, as illustrated by the Federal Reserve's 'dot plot' chart, which anticipated three rate cuts in 2024, amounting to a total of 75 basis points.

An upcoming update on the median expectations of Federal Reserve officials is anticipated next week, which could provide further insight into the future direction of U.S. monetary policy and potentially influence market expectations.

The data released yesterday serves to reinforce the Federal Reserve's cautious stance regarding inflation. The Fed has not yet declared victory over inflation and seems to be taking a wait-and-see approach, preferring to base its decisions on additional data releases.

Should future data reveal worse-than-expected inflation figures (i.e., higher than anticipated), the Fed might abandon the typical cycle of regular rate cuts in favor of more gradual and measured adjustments to the key parameters of its monetary policy. Such an approach could potentially benefit the U.S. dollar. However, at this point, this scenario remains purely speculative and theoretical.

The exchange rate of the Euro against the U.S. dollar (EUR/USD) experienced a downturn yesterday, reaching the round figure of 1.09, and is currently trading slightly above this level. Meanwhile, gold prices have retreated to 2160 USD, distancing themselves from the record highs set last Friday following the release of the Non-Farm Payroll (NFP) data. The stock market, surprisingly, showed a positive trend despite the higher Consumer Price Index (CPI) indicators.

Specifically, the technology-focused Nasdaq Composite Index gained 1.5%, while the broader S&P 500 Index increased by 1.1%. This resilience in the stock market amidst higher inflation rates could be indicative of investor optimism about future economic growth or other factors influencing market sentiment.



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