Will Hot Inflation Data Kill Rate-cut Hopes in the Stock Market Rally?

Investors who are bullish on the stock market may question the significance of interest rate cuts, considering recent developments. Initially, there were high hopes for the Federal Reserve to implement six quarter-point rate cuts throughout 2024, starting in March. However, these expectations have dwindled to approximately three cuts, as indicated by the CME FedWatch Tool. Notably, March passed without any rate cuts.

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Despite this, stock markets continued to soar to record highs, with the S&P 500 index achieving a gain of slightly over 10% in the first quarter. The optimism surrounding rate cuts took a hit following an impressive March jobs report, which revealed the addition of 303,000 new jobs to the economy and a drop in the unemployment rate from 3.9% to 3.8%. Consequently, the likelihood of a rate cut in June now stands at just slightly above 50%. Nonetheless, stocks rallied towards the end of a week marked by losses, reflecting the resilience of market sentiment.

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This serves as a reminder that earnings remain the focal point in the stock market arena. The strength of the economy and the steadfastness of consumers contribute to expectations of earnings growth, propelling the ongoing rally in the stock market, as emphasized by market observers following the robust jobs data.

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However, investors are mindful that the upcoming release of the March consumer-price index on Wednesday will be a crucial test for rate expectations. Following persistent high readings in January and February, any indication of a stall in the downward trend for inflation, coupled with strong jobs data, could prompt investors to reassess the likelihood of rate cuts in 2024.

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Lauren Goodwin, an economist and chief investment strategist at New York Life Investments, highlighted the potential challenges for equity bulls if rate-cut expectations diminish further. According to Goodwin, there is anxiety among floating-rate borrowers awaiting lower rates for refinancing, and a shift away from rate cuts could impact their business decisions, including hiring.

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Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, believes that while there's room for stocks to continue rallying in 2024, the Fed's actions regarding rate cuts won't dictate the market's trajectory. Drawing parallels to the 1990s, Tengler notes how Fed Chairman Alan Greenspan's strategy involved aggressive rate increases in 1994 followed by rate cuts in subsequent years to sustain noninflationary growth, which could be replicated by the Fed today.

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Tengler suggests that the Fed, under Chair Jerome Powell's leadership, is inclined towards delivering at least one rate cut. However, she remains indifferent to whether the Fed delivers three cuts, emphasizing her focus on broader market dynamics.

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Nevertheless, concerns persist regarding inflation data. If inflation indicators such as the CPI and the producer-price index continue to show elevated readings, leading to a more hawkish stance from the Fed, it could negatively impact stocks. Nonetheless, Tengler expresses readiness to capitalize on any market downturns.

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Despite a strong finish to the previous week spurred by favorable jobs data, major indexes experienced weekly losses, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all ending lower. The Dow saw a decline of 2.3%, while the S&P 500 and the Nasdaq shed 1% and 0.8%, respectively.

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