{"id":187791,"date":"2023-03-31T12:16:43","date_gmt":"2023-03-31T16:16:43","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=187791"},"modified":"2023-03-31T13:22:01","modified_gmt":"2023-03-31T17:22:01","slug":"markets-finish-the-quarter-in-stride-on-cooler-inflation-mar-31-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/markets-finish-the-quarter-in-stride-on-cooler-inflation-mar-31-2023\/","title":{"rendered":"Markets Finish the Quarter in Stride on Cooler Inflation: Mar 31, 2023"},"content":{"rendered":"\n

This morning\u2019s Personal Consumption Expenditures (PCE) Price Index came in lower than expected, giving the Federal Reserve a bit of wiggle room in its difficult position of curtailing inflation while maintaining banking stability. Nevertheless, the PCE report shows the Fed still needs to do more work to fight inflation.<\/p>\n\n\n\n

For February, the headline and core month-over-month (m\/m) PCE inflation numbers of 0.3% were better than the analysts\u2019 consensus expectations of 0.4%, indicating that disinflation is continuing after a setback for core disinflation in January. Both February numbers are an improvement from January\u2019s headline and core numbers of 0.6% and 0.5%. On a year-over-year (y\/y basis), the headline and core PCE for February climbed 5% and 4.6%, also better than the prior month\u2019s 5.3% and 4.7%.<\/p>\n\n\n\n

While the headline and core numbers are declining, this morning\u2019s PCE data shows that one of the Fed\u2019s greatest challenges\u2014persistent inflation in the services sector\u2014is weakening. In February, the services component of the PCE climbed 0.3% m\/m compared to 0.6% in January. Consistent with declining services prices was a notable decline in consumer spending during the month, with personal spending growing only 0.2% on the month, a lot slower than the prior periods 2% increase. The cooling of both spending and services prices are likely occurring as the economy digests 475 basis points of tightening from the Fed while the labor market cools, albeit at a snail\u2019s pace.<\/p>\n\n\n\n

\"Progress<\/figure>\n\n\n\n

Markets are cheering the news of weaker inflation, largely ignoring the slower spending numbers as we finish off the quarter. The S&P 500 and NASDAQ Indices are up 0.6% and 0.8%, respectively, while bond yields are relatively unchanged. The Dollar Index is up 0.3% to 102.47 and WTI crude oil is recovering a lot of lost ground, climbing 0.6% to $75 as traders shrug off economic slowdown concerns.<\/p>\n\n\n\n

The modest decline in the PCE comes as investors wade through somewhat conflicting economic developments, including the Fed\u2019s efforts to fight inflation while maintaining sufficient liquidity to prevent further banking instability in the aftermath of Signature Bank and Silicon Valley Bank failures and the ongoing bailout of First Republic Bank.<\/p>\n\n\n\n

The Fed Balance Sheet Contracts for the First Time in Four Weeks<\/strong><\/h2>\n\n\n\n

After allowing its balance sheet to decline to a low of $8.34 trillion as of the start of March, the Fed abruptly began increasing its assets to support the banking sector through its new Bank Term Funding Program. The Fed\u2019s balance sheet reached $8.73 trillion as of March 22. The Fed subsequently reduced the balance sheet to $8.71 trillion as of Wednesday. The expanded balance sheet, along with leaders from the Fed, the U.S. Treasury and the FDIC maintaining that the bank sector is strong, appears to have helped calm overall fears about a potential banking contagion.<\/p>\n\n\n\n

Meanwhile, recent earnings reports depict the continuing trend of strong demand for entertainment and traveling amid a glut of consumer goods. The strong demand for travel and entertainment is likely to make it hard for the Fed to curtail inflation in the non-housing services sector. Earnings reports from Dave & Busters and Carnival Corp. illustrate consumers\u2019 strong demand for travel and entertainment while Micron\u2019s earnings report illustrates the inventory overhang in consumer goods.<\/p>\n\n\n\n