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Market Takes a Breather: Inflation Data Sparks Reassessment of Interest Rates

Inflation is hotter than expected, is market going to take a break?

Stocks are lower after the second hot inflation report this week raised concerns about the path of interest rates. Inflation is getting hot again.   With the strength of the economy, the PPI came in hotter than expectations with .03%.  The market will probably take a pause to re-evaluate the future economic data and economy.  The prediction of early interest rate cuts is off the table.  The economy is too strong and there will be a need to continue holding rates steady (“higher for longer”) or raise rates. The market has had multiple record highs in 2024. 

Investors have spent the week assessing the direction of the U.S. economy, particularly after this week’s hotter-than-expected inflation data and a surprisingly steep decline in January retail sales, which may indicate further weakness in consumer spending. Consumer confidence is due out later this morning. This will be eagerly awaited by investors.

Market expectations and Federal Reserve (Fed) monetary policy projections have become better aligned.  The good economic data has been a driving force of the market’s repricing of rate cuts, reducing the likelihood of a hard-landing scenario.  Earnings have also performed higher than expected but companies are guiding down for additional quarters.  This is a typical management philosophy to under promise and overdeliver. However, there will need to be discipline and patient as the economic data is showing weakness.  A moderating economy is what the Fed wants to see, the optimism of the past quarter was overly optimistic.  The market will be looking to consolidate gains and await new economic data 

In corporate news, shares of food delivery service DoorDash dropped on a wider-than-expected loss, while digital advertising company Trade Desk popped after topping analysts’ fourth-quarter revenue estimates and offering an upbeat outlook for the first quarter. Shares of semiconductor equipment maker Applied Materials also jumped on positive earnings results.

The market is going to be in a rebalance mode. Investors should maintain a long-term focus.   Investors should always be disciplined and patient.   The focus should be on quality and growth 

Key Points:

  • Hotter than expected inflation
  • Realignment of market expectations and Fed policy
  • Moderation in economic growth
  • Shift in focus towards quality and growth

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