We live in interesting times. It's hard to believe that on Monday, as one of the largest bank failures in U.S. history reached its resolution, the S&P 500 touched a three-month high.
The resilience of this market is outstanding, despite the fact that the bullish action continues to be driven by a handful of big names. One of my colleagues is now referring to the S&P 500 as the "S&P 5."
On Monday, software juggernaut Microsoft (MSFT) reached its highest level in over a year. Nvidia (NVDA) has gained an incredible 97.4% since January 1. Apple (AAPL) , which has climbed 30.5%, just touched $170 for the first time since August. Apple is scheduled to report earnings after the close on May 4.
This bullish run is occurring against a backdrop of rising interest rates. The current assumption is that turmoil in the financial sector will cause banks to tighten lending standards, which in turn will slow the economy. The slowdown in lending should allow the Fed to end its current series of rate hikes by June.
However, even as growth begins to slow, inflation is far from defeated.
While most investors focus on the consumer price index (CPI), the Fed's favored measure of inflation is the core personal consumption expenditures index. Core PCE, which excludes food and energy prices, climbed 0.3% in March, after an 0.3% advance in February.
Chart Source: Fair Economy
While the above graph reveals "sticky" inflation at the consumer level, it's also visible in the manufacturing sector. The ISM manufacturing prices paid index jumped to 53.2 on Monday, well above analysts' expectations of 49.4.
Any reading above 50 indicates expansion. The 53.2 result was the highest level for the indicator since August.
Chart Source: Fair Economy
Even as input prices are rising, there is evidence that manufacturing itself is on shaky ground. I'm referring to the Philly Fed manufacturing index for April, which plunged to -31.3.
That's the lowest reading for the index in three years, and well below expectations of -19.1. Philly Fed is now at levels associated with a recession.
Chart Source: Fair Economy
Inflation also remains sticky despite slowing growth in Europe. Tuesday's CPI flash estimate for Europe showed inflation at the consumer level rising from 6.9% to 7%.
Chart Source: Fair Economy
Stagnation plus inflation equals stagflation, which now appears to be a real possibility. That's an unpopular word, so we shouldn't expect to hear it on Wednesday.
The FOMC will likely raise the Fed Funds rate by 25 basis points on Wednesday, but investors should focus on the statement and the press conference afterward. Concerns about the stickiness of inflation could result in a higher terminal rate, and the anticipated rate cuts that are priced in for later this year could evaporate.
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