U.S. equities finished negative for the week: The Dow Jones Industrial Average (Dow) lost 389 points, or fell 1.54%, to 24,947. The Standard & Poor’s (S&P500) index lost 35 points, or fell 1.24%, to 2,752. The Nasdaq closed 1.04% lower at 7,482, while the 10-year Treasury ended the week at 2.848%.
Inflation fears abate: Last week, the Bureau of Labor Statistics reported U.S. Consumer Price Index (CPI) and core CPI (ex-food and energy) for February both rose +0.2% m/m, and +2.2% y/y (+2.1% in Jan) and +1.8% y/y (unchanged from Jan) respectively, in line with expectations. The indexes for shelter, apparel and motor vehicle insurance all rose and contributed to the 1-month increase, while the food index remained unchanged.
Investors have been watching inflation numbers very closely and reacted favorably to the muted numbers. Although last month’s numbers were in line, expectations are generally for inflation to continue to edge upwards. While consumer’s Inflation Expectations from the University of Michigan Survey have been bottoming, other surveys such as the Cleveland Fed’s 1-Year Expected Inflation Rate and the 5-Year, 5-Year Forward Inflation Expectation Rate are trending higher.
The week ahead will be relatively quiet on the earnings front with a few notable reports from Fedex, Oracle, General Mills, Accenture, and Nike among others.
On Wednesday, investors will closely watch the Federal Open Market Committee (FOMC) meeting with expectations for a rate hike announcement. The focus will be on the updated dot plot, which will show whether more Fed officials favor four rate hikes as opposed to three for the rest of the year. In December of last year, Fed officials expected to raise rates gradually to allow the economy to expand without necessarily overheating and subsequently penciled in three rate hikes for 2018 and two each for 2019 and 2020. However, the already steadily growing U.S. economy just received a fiscal boost from tax reform and increased federal spending, raising questions about whether or not more rate hikes are needed to stave off inflation. In addition, this FOMC meeting will be the first led by Jerome Powell since he was appointed Chairman, and investors will be closely watching his language to see any shift in sentiment.
Other economic data includes Euro-zone trade balance to be released on Monday and Flash Purchasing Managers Index (PMI) data for both the U.S. and Euro-zone on Thursday.