Inflation — More than a year later, persistent inflation continues to be a thorn in the Federal Reserve’s shoes.
Even with the banking sector’s current predicament and investors on edge after two prominent banks failing in March, inflation remains the Fed’s top concern.
However, this week’s Consumer Price Index (CPI) could determine if the central bank will need to raise rates again in May.
The CPI is set to be announced on Wednesday at 8:30 in the morning.
The upcoming index could also affect markets as Wall Street has shifted its focus from the financial system to the economy.
Greg McBride, the chief analyst at Bankrate noted, “Inflation is no less relevant than it has been for the past two years.”
“The Consumer Price remains the most-watched monthly economic report.”
What’s happening?
According to CPI readings, inflation levels have cooled down for five consecutive months.
However, they are still close to historic highs at 6%, which is above the Federal Reserve’s goal of 2%.
The March reading showed prices increasing between January and February.
Greg McBride said the increase didn’t spur any confidence of the 2% target being around.
For March, economists projected a 0.4% monthly increase in the CPI, aligning with the September – February average, keeping year-over-year averages high.
But it has presented the question of how to make the Federal Reserve and investors happy.
McBride offer some insight, saying:
“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation.”
“We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”
However, Greg Bassuk, the CEO of AXS Investments, noted that resiliently elevated prices could potentially lead to another Fed rate hike in May.
“That’s notwithstanding the slowing economy that has been weighed down even more heavily by the banking system debacle,” added Bassuk.
Effect on the market
According to US Bank Wealth Management chief equity strategist Terry Sandven, the week is set up for increased stock volatility, stuck between inflation data and the start of the first-quarter corporate earnings season.
Three prominent US banks are set to report this Friday, including:
- JPMorgan Chase
- Wells Fargo
- Citigroup
“Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices,” said Sandven.
“Each will be in focus this week.”
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Bank stocks
On Monday, TD Ameritrade released its March Investor Movement Index, which tracks retail investor activities.
According to the report, retail traders continued to be equities net buyers in March, which means Main Street traders are buying most of the new stock in the United States, not larger financial institutions.
The increasing power of the retail investor has been a continued trend since the onset of the pandemic, fueled by several factors like:
- Stimulus cash
- Easier access to trading platforms
- Further market education
Recently, larger companies have started changing their investor relations strategies to accommodate retail investors.
Even ‘smart money’ traders have turned to Reddit for stock tips.
TD Ameritrade found that the strongest buying interest is focused on the Financial sector, which comes despite macroeconomic catalysts in March like the collapse of Silicon Valley Bank and Credit Suisse’s emergency sale.
Lorraine Gavican-Kerr, TD Ameritrade’s managing director, said:
“March was full of surprises, but the overall impact among TD Ameritrade retail clients when it came to exposure to the markets was neutral.”
“For the second month in a row, our clients were net buyers of equities, seemingly eyeing an opportunity to buy into the Financial sector’s lows and to sell off the highs in Information Technology.”
TD Ameritrade noted that the five most popular stocks purchased were:
- Amazon
- Ford Motors
- First Republic Bank
- Rivian
- Tesla
Meanwhile, retail investors were net sellers of:
- Advanced Micro Devises
- Apple
- Intel
- Meta
- NVIDIA
Increased short-term inflation expectations
The Federal Reserve Bank of New York’s March Survey of Consumer Expectations was released on Monday.
It said that inflation expectations have increased at the short-term and medium-term horizons.
According to the survey, inflation expectations for 2023 have increased by half a percentage point to 4.7%, the first increase since October 2022.
The survey questions around 1,300 household heads in the United States each month.
It found that respondents were more pessimistic about the US labor market’s outlook compared to previous months.
Meanwhile, the New York Fed found that unemployment expectations increased by 1.3 percentage points, going up to 40.7%.
The recent banking crisis and looming credit crunch have raised concerns in US households.
The Federal Reserve reported that perception of credit access compared to 2022 fell in March.
The share of households saying it’s harder to obtain credit than in 2022 hit an all-time high.
