As a better-than-feared earnings season wraps up, investor attention is shifting focus to macroeconomic data, which also proved better than expected last week, driving domestic markets higher. For example, U.S. core durable goods new orders came in above consensus expectations, and housing prices continued to reaccelerate. Additionally, while the second revision of U.S. GDP fell from 3.3% to 3.2%, personal consumption was revised higher from 2.7% to 3.0%. The S&P 500® finished the week slightly up and ended February with a positive return for the fourth consecutive month. Domestic small-cap equities were the top-performing asset class of the week, as the Russell 2000® had its best weekly performance since December.
This week, investors are closely monitoring Friday’s release of U.S. employment data. Markets expect the data to show a resilient labor market; however, a strong reading may be viewed negatively given it decreases the probability of near-term interest rate cuts.
Chart of the Week
The core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, rose 0.42% month over month (m/m), marking its largest increase in more than a year.
In our view, the increase in core PCE reminds us that restrictive monetary policy does not ensure a straight-line decline in inflation, and that the journey to the Federal Reserve’s 2% inflation target (which consensus expects to occur in the coming year) remains challenging.
We believe elevated inflation will continue to act as a headwind to economic growth, earnings growth and broader equity market participation.