Stock market's 2024 bull run faces looming inflation report

By Christine Idzelis

"This is an extraordinary time to be taking risk in the United States," says Phil Camporeale of JP Morgan Asset Management.

The U.S. stock market faces an inflation reading that will test its 2024 bull run and offer clues about whether the economy remains on track for an expected soft landing.

Many investors expect the Federal Reserve to begin cutting interest rates in 2024 as it appears to be winning the battle against inflation even as the unemployment rate remains low. All eyes will be on the Consumer Price Index's February inflation report on Tuesday, with traders trying to discern how soon any potential Fed rate cuts could come.

"They don't need inflation to be at 2% for relief," Phil Camporeale, portfolio manager for JP Morgan Asset Management's global allocation strategy, said in a phone interview. "They just need inflation not to get worse."

Inflation has fallen substantially from its 2022 peak of just over 9%, but has fallen short of the Federal Reserve's 2% target. Additionally, January inflation data from the Consumer Price Index was more positive than expected, leading to a sharp decline in US stocks on the day the report was released.

But in Camporeale's opinion of the markets, "this is an extraordinary time to take risks in the United States"

According to the US jobs report released on Friday, "the Federal Reserve is still on track to begin cutting rates this year without a recession," Camporeale said. "That's really good for stocks."

Friday's jobs report showed that job creation in February was stronger than expected, but that wage growth cooled and payroll increases from the previous two months were revised downward.

Slower wage growth and "a moderation" in job creation help ease inflationary pressures, Camporeale said. And although the U.S. unemployment rate rose to 3.9%, he said it has been below 4% for more than two years in the longest period since the 1960s.

The economy has been "resilient" but is not accelerating in a way that increases the risk of inflation soaring, according to Camporeale.

The central bank has held its benchmark rate steady at the current target range of 5.25% to 5.5% - the highest level in 22 years - since July in an effort to sustainably reduce inflation towards its target of 2%.

If February's inflation reading falls "outside a narrow band of expectations," it risks moving "the needle more quickly" in the stock market, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a telephone interview.

Meanwhile, U.S. stocks have a "a little more nuanced" relationship with the bond market this year, with the rise and fall of Treasury yields influencing the breadth of the market rather than simply moving up or down. lower the overall stock market, he said. When returns increase, breadth may worsen; and when yields decline, breadth may improve, according to Sonders.

Read: S&P 500 Breadth 'Still Narrow' After Record Peak – These Four Stocks Drive February Gains

The yield on the 10-year Treasury bond BX:TMUBMUSD10Y ended Friday at 4.088%, the lowest rate since February 2 at 3 pm ET levels, according to Dow Jones Market Data. Still, the 10-year yield is up nearly 23 basis points so far this year.

Camporeale told MarketWatch last year that the rise in Treasury yields in September was part of "a bid farewell to the recession," although its rise raised anxiety among stock market investors who were still nervous afterward. of being hit by a rise in yields in 2022. as the Federal Reserve combated rising inflation with rate hikes.

"In 2023 recession fears recede even further; this year that has happened with expectations of interest rate cuts," Camporeale said.

Traders in the federal funds futures market now expect the Federal Reserve to begin cutting rates in June, according to the CME FedWatch Tool in its latest review on Friday. That's when Camporeale said he anticipated a possible rate cut by the Federal Reserve, "absent a material upside impact" in Tuesday's inflation report.

The U.S. stock market closed lower on Friday, with the Dow Jones Industrial Average DJIA, S&P 500 SPX and the tech-heavy Nasdaq Composite COMP all posting weekly declines.

Still, the S&P 500 closed Friday up more than 7% for the year and less than 1% from its record close of 5,157.36 on March 7, according to Dow Jones Market Data.

JP Morgan Asset Management's Camporeale said he has been overweight equities this year, with a preference for large-cap U.S. stocks over small-caps in the current market environment.

While he expects this year's rally to "broaden," Camporeale said he is not positioned for a "goldilocks" scenario in which the Federal Reserve cuts rates four to five times as much because inflation will fall to 2 % by the end of 2024.

Rather, by his definition of a soft landing, the U.S. economy will avoid a recession with gross domestic product growth of 2% "around trend," while inflation will fall "not quite" to 2% by the end. of year.

Camporeale expects the Federal Reserve to gradually lower rates this year and that inflation will not accelerate under the soft landing he sees occurring.

The February consumer price index report "should ease concerns that inflation is reaccelerating after the January data," U.S. economists at BofA Global Research said in a note dated March 7. "We expect a slowdown in core inflation."

-Christine Idzelis

This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.

 

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03-10-24 1201ET

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