Last week saw several key economic reports being released, which could have a significant impact on the stock market. In this blog post, we will summarize the main points from these reports and discuss ways the market might have interpreted them in its pricing.
𝙁𝙚𝙙𝙚𝙧𝙖𝙡 𝙍𝙚𝙨𝙚𝙧𝙫𝙚: The Fed Chair indicated that the central bank is prepared to increase the pace of rate hikes, depending on the data. This came as recent economic data appeared stronger than expected, suggesting that interest rates may be higher than previously anticipated. The federal funds rate was raised by 25bps to 4.5%-4.75% in February.
The market now believes further rate rises are unlikely, but an increase in the federal funds rate means the market would usually be less optimistic about equities and may look to move funds towards fixed income. This is something markets have been pricing in throughout 2022. Investors should pay attention to the fact that markets are forward looking, and will likely begin to price in rate cuts if it appears to be a possibility in the near term.
𝙐𝙆 𝙐𝙣𝙚𝙢𝙥𝙡𝙤𝙮𝙢𝙚𝙣𝙩: The number of people claiming unemployment benefits in the UK fell by 11.2 thousand in February, while the unemployment rate remained stable at 3.7%. Total pay growth eased, and in real terms, wages dropped by 3.2%, the largest decline since 2009.
Lower UK unemployment figures could lead to increased consumer spending, potentially benefiting businesses and driving stock prices higher. However in the current economic environment, it is likely consumers will be cautious.
𝙐𝙎 𝙄𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣: The core consumer price inflation rate in the US eased for the fifth consecutive month, reaching 5.5% year-on-year in February. The annual inflation rate also slowed to 6%. Despite the decrease, US inflation remains three times above the Fed's target of 2%.
The easing of inflation rates in the US could reduce the urgency for the Fed to hike interest rates aggressively, providing some relief for the stock market. Factoring in the recent turmoil seen in the banking sector and the likelihood of further rate hikes becomes even less likely.
𝙐𝙎 𝙋𝙧𝙤𝙙𝙪𝙘𝙚𝙧 𝙋𝙧𝙞𝙘𝙚𝙨: Producer prices for final demand in the US unexpectedly fell by 0.1% month-over-month in February, primarily due to decreases in goods prices and services costs.
The unexpected drop in producer prices might signify weaker demand or increased competition in a normal market, but here we can see that producer prices are simply returning to pre-pandemic levels.
𝙐𝙎 𝙍𝙚𝙩𝙖𝙞𝙡 𝙎𝙖𝙡𝙚𝙨: Retail sales in the US dropped by 0.4% month-over-month in February, contrasting with the previous month's 3.2% surge.
The decline in US retail sales may be a sign of decreased consumer spending, which might negatively affect businesses' revenues and, consequently, stock prices.
𝙐𝙎 𝘽𝙪𝙞𝙡𝙙𝙞𝙣𝙜 𝙋𝙚𝙧𝙢𝙞𝙩𝙨: Building permits in the US surged 13.8% to a seasonally adjusted annual rate of 1.524 million in February, the highest reading in five months.
The increase in US building permits could signal a recovery in the housing market as builders feel more optimistic for the future, potentially benefiting related sectors and driving stock prices higher. This could mean more jobs, as well as higher demand for construction materials and related services. Increasing permits suggests builders aren’t seeing a significant recession ahead as you would typically see building starts decline if a recession seemed to be looming. This is something we have seen up until recently, as this report marks a significant deviation from the year long trend of falling permits. If we see a confirmation towards a new trend in the data within the next couple of reports, this could indicate waning recessionary fears and optimism for the housing market.
𝙐𝙎 𝘾𝙤𝙣𝙨𝙪𝙢𝙚𝙧 𝙎𝙚𝙣𝙩𝙞𝙢𝙚𝙣𝙩: The University of Michigan consumer sentiment index dropped to 63.4 in March, primarily due to persistently high prices and concerns about the financial turmoil.
The drop in US consumer sentiment could lead to reduced consumer spending and negatively impact businesses' revenues and stock prices, this seems to compliment retail sales data seen earlier in the week. Consumers are more cautious in their spending habits, shying away from large purchases, as mortgage rates remain at elevated levels.
Overall, these economic reports present a mixed picture for the stock market. While some reports, such as the increase in building permits and the easing of inflation, could have a positive impact, others, such as the decline in retail sales and consumer sentiment, might weigh on stock prices. Yet the current situation surrounding Banks is taking center stage, and is likely to influence the markets to a greater degree, until fears of systemic risks wane. Investors should keep a close eye on these developments to make informed decisions about their portfolios.
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