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Market’s focus shifts to employment and inflation

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Miguel A. Rodriguez
Miguel A. Rodriguez
12 April 2023

After the release of the non-farm payroll data showed that the US labor market is still quite robust, markets are now waiting for the release of the Consumer Price Index (CPI) today to shed more light on inflation.

The minutes from the most recent Federal Reserve (Fed) meeting and the inflation report caused the North American stock markets to behave in a variety of ways. 

Today's release of the Consumer Price Index (CPI) data will be watched by investors as it could have an impact on the Fed's policy decisions at its next policy meeting in May. 

The expectation that the Fed may pause or stop raising interest rates caused the US Stock Indexes to increase in the first quarter of the year, particularly the Nasdaq 100, which is composed primarily of technology stocks. But this expectation is slowly fading as the market is now betting that the Fed will increase interest rates by another quarter of a percentage point next month. 

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One of the main causes for the market to anticipate the end of rate hikes was the crisis involving American regional banks, but since the crisis was quickly resolved and did not spread to other financial institutions, any chance that this event may have swayed the Fed’s decision has been eliminated. With the chapter on the banking crisis seemingly closed, the market now shifts its focus to employment and inflation.  

Analysts expect today's CPI to show that inflation rose 5.2% in the year to March after a 6.0% annual increase in February. Core prices, which are those prices excluding food and energy, are expected to rise 5.6%, which would be a moderate increase from February. 

Only significantly lower CPI statistics, particularly the underlying CPI, would be able to cause a decline in US Treasury bond yields from their current levels (the 2-year bond is currently trading at 4.04%), which would then propel stock market indexes higher. The non-farm payroll figures released last Friday, which revealed a labor market that is still relatively strong, did not assist in this regard. 

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Big banks including JPMorgan, Citigroup, and Wells Fargo will begin releasing their first-quarter earnings reports on Friday. Analysts will be keenly observing what CEOs say about credit conditions and customer behavior. 

Analysts expect a 5.2% decline in first-quarter earnings for S&P 500 companies compared to the same period last year, but it's important to remember that the market will perform according to forecasts. Thus, earnings that are lower than those of the first quarter of last year but higher than anticipated would benefit the market. 

 

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Sources: Bloomberg, Reuters 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.