PCE of Mind: Friday's Inflation Data Met Expectations, Lifting Stocks to Start Quarter with Jobs, Factory Climate in Focus

The new quarter begins with major indexes modestly higher in premarket trading and investors looking ahead to this morning's ISM manufacturing data. Yields are a little higher but not dramatically so following an in-line PCE inflation number released Friday. Mega caps trended slightly higher overnight. Focus this week is on Friday's Nonfarm Payrolls report.

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Key Takeaways

  • After 10% market gains in Q1, new quarter begins with DJIA approaching 40,000

  • Yields mostly tame following in-line PCE inflation data released Friday when market was closed

  • U.S. March manufacturing data on tap today following signs of strength in China’s factories

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(Monday market open) The new quarter kicks off Monday with major U.S. indexes modestly higher after a 10% gain for the broader market in Q1. The Dow Jones Industrial Average® ($DJI) is brushing up against 40,000, and that’s no April fool.

Today features vital U.S. manufacturing data following signs of improvement in China’s manufacturing climate. Looking in the rear-view mirror, Friday’s U.S. February Personal Consumption Expenditures (PCE) prices report didn’t demonstrate much progress fighting inflation but didn’t delivery any ugly surprises, either. There was no opportunity to trade the numbers Friday with the markets closed for Good Friday, so last night’s futures market action was the first chance to react.

PCE rose 0.3% month over month in February, below an upwardly revised 0.4% rise in January, and also shy of the Trading Economics consensus forecast of 0.4%. Prices for services climbed 0.3% and goods rose 0.5%. The annual rate of 2.5% met forecasts but rose from 2.4% in January.

Monthly core PCE inflation, which strips out food and energy and is the Fed’s preferred inflation measure, slowed to 0.3% from an upwardly revised 0.5% in January, matching expectations. The annual core inflation rate slowed to 2.8%, the lowest in about three years, from 2.9%. That, too, met expectations, but the downward progress continues to lag well above the Fed’s 2% target rate.

“Since PCE was in line with expectations, it’s unlikely to change the outlook for Federal Reserve policy,” said Cooper Howard, fixed income strategist at the Schwab Center for Financial Research. “Monthly readings of inflation have stalled out recently but the overall trend in inflation has been lower. We expect rate cuts to start this summer but for the Fed to move at a slow and deliberate pace based on the data.”

On Friday, Fed Chairman Jerome Powell reiterated that central bankers need to see further signs price pressures are cooling and officials aren’t likely to act until they see “more good inflation readings.” Powell’s comments seemed to echo the sentiment from Fed governor Christopher Waller, who noted Wednesday that recent inflation data make the case for officials to hold off on lowering rates in the short term.

Futures based on the S&P 500® index (SPX) were up 0.1% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) climbed 0.2%. Futures based on the $DJI were flat. Futures pulled back just ahead of the open from initial strong overnight gains.

Morning rush

  • The 10-year U.S. Treasury yield (TNX) rose one basis point to 4.21%.
  • The U.S. Dollar Index ($DXY) climbed to 104.53, just off its 2024 highs.
  • The CBOE Volatility Index® (VIX) popped to 13.62 but remains well below recent peaks.
  • WTI Crude Oil (/CL) fell to $82.81 per barrel.
  • Bitcoin (/BTC) eased below $70,000 and recently traded at $69,491.

The new quarter begins after an old one that didn’t deliver the lower borrowing costs investors had expected entering the year. The benchmark 10-year U.S. Treasury note yield hovered near 4.3% for parts of Q1 after sinking as low as 3.8% late in 2023, and the more rate-sensitive 2-year Treasury yield rose sharply to trade above 4.6%. The inversion between the 10-year and 2-year yields widened during the quarter, which can be a sign of economic weakness ahead. That said, the inversion’s been in place for more than a year and economic growth has improved.

Just in

Separate data last Friday showed February Personal Income up 0.3% and Personal Spending up 0.8% in February. Economists were expecting a 0.4% increase in incomes and a 0.5% rise in spending. The higher personal spending versus income suggests consumers may be dipping into their savings to make purchases.

This morning brings the Institute for Supply Management’s (ISM) Manufacturing PMI® for March soon after the opening bell. Analysts expect a headline of 48.4, according to Trading Economics. The February number was 47.8. February marked the 16th straight month of the PMI being below 50, the dividing line between expansion and contraction. Prices fell in the February report and could be a focus point today as another read on U.S. inflation.

The Caixin China General Manufacturing PMI rose to 51.1, above the Trading Economics consensus of 51 and the fifth straight month of growth in factory activity there. It was the highest reading in a year. The official China manufacturing PMI, released before the Caixin number, rose into expansionary territory for the first time since last September. The new strength could be positive for China’s stock market, but check for any possible upward move in commodities that may be associated with stronger Chinese demand.

What to watch

With PCE behind us, focus turns to this coming Friday’s U.S. March Nonfarm Payrolls report. As of late last week, analysts expected March jobs growth of 200,000, down from 275,000 in February, and an unchanged unemployment rate of 3.9%, according to Trading Economics. Average hourly earnings are seen rising 0.3% month over month and 4.1% year over year, compared with 0.1% and 4.3% in February.

February’s report was a mixed affair, with a robust headline number of 275,000 but downward revisions to the December and January reports. That helped quell some concerns about rising jobs growth contributing to inflation.

Before that, tomorrow brings the February Job Openings and Labor Turnover Survey (JOLTS). Analysts expect a headline of 8.79 million, down from 8.86 million the month before, Trading Economics said.

Fed speakers are abundant this week, starting with Fed Governor Lisa Cook today. What they say about the recent inflation data could have a market impact. More than a dozen Fed speakers are scheduled, and the rise today in both yields and the dollar suggests investors may be nervous about hearing their views. The question is whether the market’s low-volume rally can push ahead if speakers don’t generally hint at an early-summer rate cut.

Flow chart: From a higher-level perspective, investors should consider monitoring the breadth and flow of stocks over the days ahead to see if sectors beyond tech and communications services continue to draw interest as the new quarter begins.

“We’ve had this recent trend of cyclical outperformance and the strongest breadth readings coming in areas like energy and materials and industrials and financials,” said Liz Ann Sonders, Schwab’s chief investment strategist.

“I think all else equal, having rotation under the surface is a healthy backdrop,” Sonders added. “It’s allowed for breadth to expand and it’s certainly a better backdrop for equity investors than the bottom falling out all at once if you kind of correct some excesses via the process of rotation. So I wouldn’t mind if that’s what continued, but I do think with sentiment fairly frothy there is some risk that we get some volatility.”

Sonders and Kathy Jones, Schwab’s chief fixed income strategist, spoke about market breadth, credit spreads, sentiment, and more in their latest OnInvesting podcast, featuring special guest Dr. Ed Yardeni, president of Yardeni Research.

Stocks in spotlight

Tesla (TSLA), one of the worst-performing U.S. stocks in Q1, is likely to be in the news this week as investors await Q1 delivery and production estimates. Consensus on Wall Street as of late last week was just below 460,000 deliveries, according to Electrek, an EV news site. That would be down from around 484,000 vehicle deliveries in Q4, but up from approximately 423,000 in Q1 2023.

Competition from European and Asian electric car makers likely hurt demand for Tesla’s vehicles in those regions early this year, analysts say. Some analysts even expect a year-over-year decline in Q1 deliveries. The exact number of cars delivered does matter, but so do margins. One reason for Tesla’s disappointing performance on Wall Street this year is falling margins as the company tries to compete by cutting prices. Revenue grew just 3% in Q4 despite strong delivery data.

Research firm FactSet now projects Q1 S&P 500 earnings per share growth of 3.6%, which would be slightly below 4.2% growth in Q4 but still the third straight quarter of growth.

As far as major company earnings this week, it’s slim pickings. Food company Conagra (CAG) is expected to report Thursday, but that’s about it. Things take off in a big way later next week, starting next Wednesday with Delta Airlines (DAL). Major investment banks follow next Friday.

Stocks on the move:

  • Tesla rose modestly in premarket trading after Reuters reported the company plans to increase the price of the Model Y by $1,000.
  • AT&T (T) fell 2.5% after a data breach caused current and former customer data to be leaked onto the dark web. The company said it’s notifying customers.
  • General Electric (GE) shares are up slightly one day ahead of the company completing the spinoff of its power generation business, which will be called GE Vernova. The remaining company is named GE Aerospace.

Eye on the Fed

Early today, futures traders saw 96% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 69%, up from 57% before last week’s PCE inflation data.

CHART OF THE DAY: CRUDE CONSIDERATIONS. Though Friday’s February PCE prices report came in close to expectations and didn’t show much in the way of change from January, rising crude oil (/CL-candlesticks) lurks as a potential inflationary factor for the months ahead. It’s already popped above its 200-day moving average (blue line) to the highest level since last fall, but last year’s surge wasn’t long-lasting. Data source: CME Group. Chart source: thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results. 

Thinking cap

Ideas to mull as you trade or invest

Yin and yen: Last week’s drop to 34-year lows for the Japanese yen caused worries there but might be a boost for U.S. consumers who can perhaps find bargains on products made in that country, a huge U.S. trading partner. In 2023, the U.S. imported $147 billion in goods from Japan, according to the U.S. Census Bureau. Those imports were dominated by machinery and mechanical appliances, followed by transportation equipment. U.S. exports to Japan include agricultural, energy, and chemical products. The news is less rosy for U.S. companies selling products in Japan, as a weak currency makes U.S. products more expensive there. However, strength in the dollar tends to keep U.S. inflation in check, which would be welcomed by the Fed and likely by consumers. Also, Japan has few domestic options when it comes to products like energy and agriculture, meaning it needs to import most of those items, perhaps blunting the currency impact for U.S. exporters.

Thursday and Q1 in review: Market action turned mixed Thursday ahead of inflation data and the holiday weekend. While the SPX and the $DJI notched new record highs, the Nasdaq Composite® (COMP) finished modestly lower Thursday. For the holiday-shortened trading week, the SPX added 0.4% and gained 3.1% for March, which marked its fifth consecutive monthly advance. For the month, the $DJI rose 2.1%, and the Nasdaq Composite added 1.8%. For the quarter, the $DJI climbed 5.6% and the Nasdaq rose 9.2%. Drilling down into sectors, Communication Services led the S&P 500 with nearly 16% Q1 gains, followed by energy at almost 13% and information technology at 12.6%. The worst-performing sector was real estate, which was the only one in the red with a 1.3% decline. Utilities and consumer discretionary were other laggards.

Breadth check: Last week’s rally took place without much participation from the biggest tech and communication services stocks, as both sectors barely rose. That’s a strong sign that there’s better breadth in the market and a rising tide is lifting more boats. In fact, the energy, financials and information technology sectors have 90% or more of their components trading above their respective 200-day displaced simple moving averages (DMAs). The next test for the broad market rally is likely to be the upcoming earnings reporting season. For more, visit Schwab’s sector views.

Calendar

April 2: February factory orders.

April 3: ADP® Employment Report

April 4: Expected earnings from Conagra (CAG).

April 5: March Nonfarm Payrolls

April 8: No major earnings or data expected.

Print

Key Takeaways

  • After 10% market gains in Q1, new quarter begins with DJIA approaching 40,000

  • Yields mostly tame following in-line PCE inflation data released Friday when market was closed

  • U.S. March manufacturing data on tap today following signs of strength in China’s factories

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