Markets hesitate as investors weigh fresh US inflation data

Dow was off 10, advancers over decliners about 3-1 & NAZ added 66.  The MLP index gained 2 to the 272s & the REIT index added 3+ to the 382s.  Junk bond funds crawled higher & Treasuries were purchased which reduced yields (more below).  Oil hardly budged in the 78s (more below) & gold rose 13 to 2056.

AMJ (Alerian MLP Index tracking fund)

An inflation measure closely watched by the Federal Reserve rose again in Jan as high prices continued to weigh on Ms of Americans.  The personal consumption expenditures (PCE) index showed that consumer prices rose 0.3% from the previous month, according to the Labor Dept.  On an annual basis, prices climbed 2.4%, down slightly from the 2.6% reading recorded the previous month.  The figures were both in line with estimates.  Prices for services increased 0.6% for the month & remain up 3.9% from the same time last year, while the cost of goods dropped 0.2% on a monthly basis despite a 0.5% increase in the cost of food.  Goods prices are down 0.5% from the prior year.  In a sign the Fed's fight against inflation is slowly making progress, core prices, which strip out the more volatile measurements of food & energy, climbed 0.4% from the previous month & 2.8% from the previous year.  It marked the best reading for core inflation since Feb 2021.   While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously said that core data is actually a better indicator of inflation.  Both the core & headline numbers point to inflation that is slowly returning to the Fed's preferred 2% target.  Other figures included in the report showed that consumer spending rose just 0.2% in Jan compared with a 0.7% increase in Dec, suggesting that Americans are pumping the brakes on spending after the pivotal holiday season.  Many economists anticipate that spending will slow further in the coming months as consumers continue to grapple with expensive goods, high interest rates & the resumption of federal student loan payments.  The report also showed a surprise jump in personal income, which climbed 1%, more than double the 0.4% estimate.

Fed's favorite inflation gauge rises in January as Americans feel the squeeze

Treasury yields inched lower after the latest inflation data was in line with predictions.  The 10-year Treasury yield fell nearly 4 basis points to 4.236% & the yield on the 2-year Treasury declined almost 2 basis points to 4.629%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  Jan's personal consumption expenditures (PCE) report matched expectations.  Headline PCE came in at 0.3% month over month & 2.4% on an annualized basis.  Excluding volatile food & energy costs, the PCE increased 0.4% in the month & 2.8% from a year prior.  Yields were marginally higher immediately after the PCE index numbers were released before pulling back.  The PCE is the Federal Reserve's favored inflation gauge, meaning investors were closely watching the data for clues into the future path of monetary policy.  Expectations for interest rates have already moved to later in the year, with markets now widely expecting the first cut to take place in Jun rather than the Mar date that was expected at the start of the year.  New York Federal Reserve Pres John Williams said a lot of progress had been made on inflation, but more work needed to be done to reach the Fed’s 2% target.  His comments echoed the sentiment conveyed by various Fed officials in recent months & weeks, who have repeatedly said their decision-making would be data-led & they were still looking for more evidence of inflation falling sustainably before cutting rates.

Treasury yields wobble after inflation data comes in as expected

Crude oil futures are headed for a 2nd consecutive monthly gain as OPEC+ is expected to extend its production cuts thru at least the 2nd qtr.  The West Texas Intermediate contract for Apr gained 10¢ to $78.64 a barrel & the Apr Brent contract, which expires today, fell 2¢ to $83.66 a barrel.  US & Brent have gained about 6% month to date with first month contracts trading at a premium to later months.  A premium for immediate versus later delivery typically indicates a tightening oil market.  OPEC+ is considering extending its production cuts thru at least the 2nd qtr & the cartel is considering keeping the cuts in place for the rest of the year.  OPEC+ agreed in Nov to slash 2.2M barrels per day in the 1st qtr of 2024 as the US, Canada, Guyana & Brazil pumped crude at a breakneck pace, putting pressure on oil prices late last year.  Prices have also risen as the conflict in the Middle East rages on, with tensions rising on the Israel-Lebanon border & Houthi militants continuing their attacks in shipping in the Red Sea.  The conflict has not disrupted crude production in the region so far, though analysts have warned there is a risk of a direct confrontation between Iran & the US that would impact the oil market.

Oil on pace for monthly gain as OPEC+ expected to extend production cuts

Stocks opened higher as investors digested a crucial inflation reading key to assess how quickly the Federal Reserve will start cutting interest rates & whether the recent rally will revive.  The data while good was not good enough to get rave reviews.  The first rate cut continues to look to be several months away.

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