Data Driven Fed Policy

Data Driven Fed Policy

Equity Markets

Stock Prices Rose in February Despite a Repricing of Rate Cuts

Investors spent the first half of February adjusting their expectations for the timing of the first rate cut and the extent to which rates could be cut in 2024 — fully pricing out all of the enthusiasm for rate cuts which fueled the sharp gain in stock prices from late October to the end of 2023 — as the data pointed to the economy maintaining solid forward momentum.

Following a near perfect report on fourth quarter 2023 real GDP — solid growth and inflation around 2% — the University of Michigan consumer sentiment measure posted its largest two-month surge since 1991, nonfarm payrolls rose a whopping 353,000 in January with net revisions of 126,000 in November and December, and the service sector purchasing managers’ survey reported a widespread increase in activity in January. All signs of the economy continuing to grow at a healthy pace.

The solid data on the economy was followed up by a somewhat hot, but rather misleading report on consumer prices in January. The CPI increased 0.3% month-to-month, while the core CPI rose 0.4%. However, the shelter component continues to distort the inflation data to the high side. The index for shelter rose 0.6% month-to-month, contributing 72% of the monthly rise in the headline CPI and 68% of the monthly rise in the core CPI. On a year-on-year basis with the shelter component higher by 6.0%, the CPI ex-shelter rose 1.5%, while the core CPI ex-shelter is higher by 2.2%.

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