2024.March.02 Markets Hit New Highs as Inflation Cools
2024.March.02 Markets Hit New Highs as Inflation Cools
Major U.S. stock indexes powered to fresh records this week as investor sentiment was bolstered by cooling inflation data. The Dow Jones Industrial Average rose 0.2%, logging its fourth straight monthly gain, while the S&P 500 and tech-heavy Nasdaq climbed 0.8% and 1.1% respectively to new closing peaks.
Driving markets was a better-than-expected January personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, which rose 2.4% year-over-year. This marks the second straight month core PCE (excluding food and energy) has hit a one-year low at 2.8%, sparking optimism that disinflationary trends are firmly taking hold.
However, digging into the data reveals risks of inflation reaccelerating. While slowing on an annual basis, core PCE increased a brisk 0.4% month-over-month in January - its fastest clip since last January. Moreover, backing out shelter costs, core PCE jumped 0.6% month-over-month, nearing its 0.62% December 2021 high.
This resurgence aligns with second-round inflation effects, where price increases broaden across the economy. With labor and housing costs still substantially elevated, it may be premature to declare victory over stubbornly high inflation.
Still, investors showed no hesitation piling into equities and risk assets Friday. Surging stocks included chipmakers like Nvidia and software firms such as Microsoft on growing excitement over AI and generative models like ChatGPT.
The generative AI rush has propelled the Nasdaq 100 up over 17% year-to-date. However, competitive risks are rising. Tech titans Meta, Microsoft, Google and startups like Anthropic are plowing resources into the space. As new innovations sap Nvidia's first-mover advantage, its stratospheric valuation creeping near dot-com era extremes warrants caution.
In fixed income markets, the policy-sensitive 2-year Treasury yield declined 0.53% on the week to 4.53%, while the 10-year yield slipped 7 basis points to 4.18%. If inflation proves sticky, traders may need to reassess expectations for rate cuts this year. For now, the data and technology's siren song keeps the party going. But with investor euphoria increasingly divorced from fundamentals, preparing for the hangover may prove prudent.