Wall St relieved after inflation data but warns Fed’s fight not over

By Lewis Krauskopf

NEW YORK (Reuters) – Investors on Tuesday welcomed a report showing U.S. consumer prices rose at an expected monthly pace but warned of uncertainty ahead, as the Federal Reserve fights to bring down inflation while juggling a banking crisis.

February’s inflation report showed consumer prices rising by 0.4%, with a year-on-year increase of 6% – in line with analysts expectations, but far above the 2% rate the Fed hopes to achieve.

The number was a relief to some investors who had worried that a stronger-than-expected report would fuel concerns over whether the Fed would need to choose between jumbo-sized rate hikes to cool inflation and maintaining stability after the recent collapses of Silicon Valley Bank (SVB) and Signature Bank (NASDAQ:) rattled the financial system.

The CPI report “was pretty much as expected. We’re at a point of market anxiety where expected is good,” said Rick Meckler, partner at Cherry Lane Investments.

Stocks rose after the numbers, and the was recently up 1.5% after falling to its lowest point since early January during trading on Monday.

Still, many investors are concerned the respite from inflation worries will be a short one.

“One thing that is abundantly clear is that inflation remains stubbornly elevated, and the Fed’s job is still not over,” wrote Rick Rieder, chief investment officer of global fixed income at BlackRock (NYSE:), the world’s largest asset manager.

“Without question, financial stability concerns are an issue investors need to keep a careful eye on, but if recent policy moves assuage markets, then we think inflationary pressures could again become the main concern,” he said.

Bets on a 50 basis point increase at the Fed’s meeting later this month spiked early last week after Fed Chair Jerome Powell suggested policymakers may raise rates higher than expected if upcoming data showed the economy remains hot.

Traders discounted those bets in the wake of SVB’s failure, and on Tuesday futures were pricing in an 72% chance of a 25 bp hike, with odds at 28% that the central bank would leave rates unchanged, according to the CME FedWatch tool.

The CPI report was not all good news. Core CPI, which excludes the volatile food and energy components, rose 0.5% on a monthly basis, above the 0.4% estimate. U.S. Treasury yields extended gains after the report following Monday’s giant decline, a potential pressure point for equities.

“Today’s report suggests that the Fed has more work to do,” said Angelo Kourkafas, investment strategist at Edward Jones. “We continue to see inflation slow down but not at the pace we were hoping to see.”

Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a Tuesday report that the bank was cautious on the outlook for equities for the remainder of 2023. Despite its recent gyrations, the S&P 500 has managed to hold on to a roughly 1.5% year-to-date gain, though it was up as much as nearly 9% at its February peak.

“Although lower bond yields and potentially looser Fed policy may come as a partial relief for equity markets, high valuations, falling earnings estimates, an increasing chance of recession, and the risk of further unforeseen consequences of Fed tightening all diminish the attractiveness of investing in the market,” he wrote.

For now, however, Wall Street’s attention is likely to be on the banking sector, said King Lip, chief strategist at Baker Avenue Wealth Management.

The CPI report “wasn’t worse than expected,” he said. “The number one focus now is, is there going to be a contagion from this regional banking crisis.”

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