In-Line

Macro Perspectives

• Stocks in the US closed mixed on the first trading day of the second quarter after solid US factory data strengthened the belief that the Federal Reserve would maintain a cautious approach to cutting interest rates.

• The S&P 500 lost 0.2%, the Dow Jones fell 240 points pulling back from its historic 40,000 level.

• In addition to the stronger-than-expected Manufacturing PMI, which indicated the first expansion in the manufacturing sector in 18 months, investors were awaiting more data this week, including the jobs report, JOLTS, and the ISM Services PMI, for further insights into the economy's health.

• Tesla (-1.8%) led losses among mega-cap stocks, while Alphabet (+3%) and Meta (+1%) rose.

• FedEx declined by 3.3% after announcing that its contract with the USPS would end in September.

The Fed's favoured inflation gauge was reported this past Friday morning (February PCE).

Markets were closed for Good Friday, creating the potential for a Sunday night reaction to the data in what is a very illiquid time for the futures markets. Probably no coincidence, hours after the PCE data, the Fed Chair was sitting on a stage at a San Francisco Fed conference for an interview on monetary policy.

The first question he was asked was on the morning's inflation report. His response: "Pretty much in-line with expectations.”

As you can see in the chart below, despite all of the hand-wringing on the inflation data, the path has been clear, and the target is nearly achieved.

Arguably, as the pace of disinflation has slowed, it has created the perfect scenario for the Fed to sit and watch. Inflation is low, and despite the highly restrictive policy stance of the Fed, the economy remains good (despite being throttled) and the job market remains solid.

This scenario actually plays into the Fed's historical policy making tendencies/preferences, which is reactive, not proactive.

And as we discussed last week, Jerome Powell happened to lay out some conditions in his post-FOMC press conference last month, that would warrant a Fed reaction: 1) unexpected weakening in the labor market, 2) the continued trend of falling inflation, toward the target and/or 3) any stress bubbling up in money markets (i.e. a liquidity shock).

So, with the Fed Funds rate nearly 300 basis points above the rate of inflation, the Fed has restocked the ammunition (to stimulate or protect downside risks with rate cuts), and now can respond to any negative event, or deterioration in the economy (or markets).

This is a Fed stance that markets are very familiar with, unlike the stance throughout the tightening cycle, where the Fed was explicitly trying to bring demand down, trying to destroy jobs and was happy to see a weaker stock market (the latter, to help achieve the former).

The evolving current stance looks like a return of "the Fed put."