Stocks Decline in Run-Up to Key Inflation Report: Markets Wrap

February 28, 2024

5 minutes read

(Bloomberg) — Wall Street traders gearing up for key inflation data waded through mixed economic figures and remarks from Federal Reserve speakers for clues on the interest-rate outlook.

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Equities saw small losses after a report showed the US economy expanded at a slower rate at the end of last year as a downward revision to inventories masked stronger household spending and investment. The data — seen as “uneventful” by many investors — came just 24 hours before the release of the Fed’s favored inflation gauge.

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Following a jump in both the consumer and the producer price indexes, Thursday’s core personal consumption expenditures gauge will likely highlight the bumpy path the central bank faces in achieving its 2% target. The PCE is seen validating recent commentary from officials showing no rush to ease monetary policy.

“The recent data is noise and should be ignored outside of its impact for very short-term market movements,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “We are more interested in the PCE data.”

The S&P 500 fell to around 5,060. Nvidia Corp. extended its decline from a record. Apple Inc. hovered near its $180 technical support. Tesla Inc. climbed. UnitedHealth Group Inc. sank on news reports that the US Department of Justice initiated an antitrust probe. Bitcoin trimmed its rally after approaching $64,000. Treasury 10-year yields slid two basis points to 4.28%.

Wall Street also kept an eye on the latest remarks from policymakers.

Fed Bank of Boston President Susan Collins said officials will likely lower rates later this year as the outlook for sustainable 2% inflation strengthens. Her New York counterpart John Williams noted the central bank still has “a ways to go” in its battle over inflation, and reiterated the Fed will likely cut borrowing costs “later this year.” Atlanta Fed chief Raphael Bostic said he is comfortable taking a patient approach.

Treasuries are on track for a second consecutive monthly loss after hotter-than-expected inflation figures curbed the outlook for rate cuts.

Traders are currently pricing around 80 basis points of easing by year-end — almost in line with what officials in December indicated as the likeliest outcome. That would equate to three rate cuts in 2024 — as the Fed moves have historically been increments of 25 basis points. To put things in perspective, swaps were projecting almost 150 basis points in easing this year at the start of February.

To Matt Maley at Miller Tabak, given that long-term Treasury yields have shown significant signs that they have seen a change in trend to the upside this year, Thursday’s inflation data could still shake things up before the week is over.

“If tomorrow’s inflation data pushes yields higher, it just might cause stock investors to finally react to this year’s change in trend in bond yields,” Maley noted.

Bolstered by speculation on rate cuts and the artificial-intelligence euphoria, equities have posted successive records since the start of 2024 and are now heading toward their fourth consecutive monthly advance. Such optimism has spurred warnings about either a consolidation or a pullback at this stage.

“We believe there are valuation concerns throughout the markets,” said David Bahnsen, chief investment officer at the Bahnsen Group. “Markets are pricing in unrealistic earnings growth at this point. It is just hard for us to rationalize entering the indexes at these levels.”

Bahnsen also notes that investors should be “prudent and selective” — avoiding a strategy that simply buys the stocks that go up.

“We expect market breadth to increase,” he added. “The only question is whether or not it increases from the top 5-10 names underperforming or the currently underperforming components of the market increasing — or some combination thereof.”

US stocks have reached a significant inflection point — poised to either “top out or broaden out,” according to Craig Johnson at Piper Sandler. Technical evidence suggests the next 10% move in the equity market is likely lower than higher, he added.

“We continue to observe overall poor market breadth,” Johnson noted. “A broadening out will favor the financial and healthcare sectors as they are among the largest weightings in the Russell 2000. A topping out would likely result from profit-taking in the ‘Magnificent Seven’ stocks.”

To Marc Dizard at PNC, while valuations are higher for the “Magnificent Seven” megacaps, they are warranted for the group delivering earnings growth that’s “significantly better” than the remaining companies in the S&P 500.

The cohort — which includes giants Nvidia Corp., Meta Platforms Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc., Apple Inc. and Tesla Inc. — saw its average earnings per share rise 55% in the fourth quarter compared to a year ago, according to data compiled by Bloomberg.

“Right now, the Magnificent Seven names aren’t an area I would over concentrate, but I wouldn’t want to neglect them in a portfolio either,” Dizard said. “So certainly have, and maintain, an exposure to these names – but keep it in context of a more broadly diversified portfolio.”

Goldman Sachs Group Inc.’s Scott Rubner — who recently dubbed Nvidia “the most important stock on planet earth” ahead of its blockbuster earnings — says it has proved impossible to call the peak in this euphoric US stock market.

Retail traders have been lured into this rally just as a Goldilocks scenario — where the economy is running neither too hot nor too cold — has been playing out, prompting analysts quickly to upgrade their year-end targets, Rubner wrote. March is now a “fuller house” and the rally is “tired,” however there is no catalyst for a potential selloff, he said.

Corporate Highlights:

Apple Inc. shareholders rejected a labor-backed request for an artificial intelligence transparency report, which would have delved into whether the company is using the technology ethically.
Microsoft Corp. said it’s investigating reports that its Copilot chatbot is generating responses that users have called bizarre, disturbing and, in some cases, harmful.
Nvidia Corp. insiders stepped up stock sales after the chipmaker’s blowout earnings report last week sent shares soaring to another record. Directors at the Santa Clara, California-based company unloaded 99,000 shares worth about $80 million at the time of the sales, according to Form 4 filings.
Coinbase Global Inc., the biggest US cryptocurrency exchange, experienced a spate of outages Wednesday just as Bitcoin continued its rally above $60,000.
US regulators issued an ultimatum to Boeing Co. in the wake of a near-catastrophic accident last month, giving the US plane manufacturer 90 days to devise a plan to fix what it called “systemic” quality-control issues.
Walt Disney Co. and billionaire Mukesh Ambani’s conglomerate have signed a binding pact to merge their media operations in India, creating a sector behemoth valued at $8.5 billion in one of the world’s fastest-growing entertainment markets.
Bayer AG’s Monsanto unit persuaded a California judge to slash by more than 90% a $332 million jury award to a former land surveyor who blamed his cancer on the company’s Roundup weedkiller.

Key Events This Week:

Germany CPI, unemployment, Thursday
US consumer income, PCE deflator, initial jobless claims, Thursday
Fed’s Austan Goolsbee, Raphael Bostic and Loretta Mester speak, Thursday
China official PMI, Caixin manufacturing PMI, Friday
Eurozone S&P Global Manufacturing PMI, CPI, unemployment, Friday
BOE chief economist Huw Pill speaks, Friday
US construction spending, ISM Manufacturing, University of Michigan consumer sentiment, Friday
Fed’s Raphael Bostic and Mary Daly speak, Friday