(Wednesday market open) Today’s March (CPI) reading arguably offered something for both interest rate hawks and doves.

A 0.1% rise in was below expectations and may fuel ideas that inflation is easing. However, a 0.4% rise in the —which strips out food and energy prices—suggests there may be more work ahead for the Federal Reserve as it wrestles with stubborn price growth.

Wall Street had expected a 0.3% increase in headline CPI and a 0.4% increase in core CPI, according to Briefing.com. February CPI growth was 0.4% and 0.5%, respectively, so both of today’s numbers represent sequential improvement.

Stock index futures initially jumped in what may have been relief that the numbers weren’t hotter than anticipated. A higher reading might have spooked investors still fearful that inflation could persist and keep rates elevated longer. Keep in mind, however, that even with the March improvement, CPI remains above the levels needed to meet the Fed’s goal of 2% annual inflation growth. It’s up 5% over the last year.

After digesting today’s CPI data, investors await minutes from the Fed’s most recent meeting, due out at 2 p.m. ET. The meeting notes could provide insights into the Fed’s decision making when it raised rates in March.

Morning rush

  • The (TNX) fell 6 basis points after the CPI data to 3.36%.
  • The ($DXY) fell to near recent lows at 101.59.
  • The Cboe Volatility Index® () futures dropped to near recent lows at 18.44.
  • WTI (/CL) climbed to near its 2023 high at $82.48 per barrel.

With the mostly trading below 20 recently, it’s only factoring in an implied SPX move of around 41 points a day. And indeed, the last week has been quiet in terms of major moves by the SPX or any of the other large indexes.

Meanwhile, Treasury yields rose early this week ahead of today’s CPI data. There may be room for short-term Treasury yields to rise a bit from here, but intermediate- and long-term Treasury yields may continue to trade in the 3.5% area in the near-term, says Collin Martin, director of Fixed Income Strategy at Schwab Center for Financial Research.

Eye on the Fed

The probability of a 25-basis-point increase next month was 66% as of this morning, according to the CME FedWatch Tool. Fed speakers so far this week have made it relatively clear that they’re ready to support a hike in May, and the market is listening. Treasury yields are up modestly over the last two days.

This afternoon features the from the March Federal Open Market Committee (FOMC) meeting, The minutes from January’s FOMC meeting showed the Fed doggedly committed to fighting inflation, still focused on the “very tight” labor market contributing to wage and price pressures. The FOMC hasn’t seen much dissent in recent months, but is that changing? The minutes could tell us.

  • The Fed’s March meeting occurred just after a round of inflation, jobs, and retail sales data signaled that the economy was slowing. It also followed two U.S bank failures that heightened concerns about how banks and businesses might handle quickly rising rates. Still, the FOMC cranked up rates by 25 basis points at that meeting. Today we’ll have a look at the conversation among FOMC officials, and whether any of them worried about the potential of additional “breaks” in the banking system resulting from more rate hikes.
  • Some at the Fed, including Chairman Jerome Powell, have noted that tightening credit conditions could do some of the central bank’s inflation-fighting job. In remarks yesterday, Chicago Fed President Austan Goolsbee echoed those views, saying he’s focused on “the potential impact of financial stress on the real economy,” Reuters reported. He added that the Fed should be cautious about raising rates too aggressively while monitoring how financial “headwinds” are assisting the central bank in pushing down inflation.
  • This morning, Philadelphia Fed President Patrick Harker said rates should rise above 5% and stay there “for a while,” Reuters reports. Harker is an FOMC voter this year. The current Fed target range is 4.75% to 5%. Two more Fed speakers are on tap today in what’s been a busy week for “Fed talk.”

Stocks in Spotlight

Teller windows ready to open: Friday brings earnings reports from several big banks, including JPMorgan Chase (NYSE:), Citigroup (NYSE:), and Wells Fargo (NYSE:). Banking giants like these saw their stocks tumble last month and not recover much since. They’ll all be in the spotlight Friday not just for the usual information on earnings, revenue, trading volume, and loan demand; their credit quality and loan books likely will be monitored more closely when they unveil Q1 results and discuss their outlook for the rest of the year. Bank of America (NYSE:), Goldman Sachs (NYSE:), and Morgan Stanley (NYSE:) report next week to round out the six largest U.S. banks.

Ready when you are: Delta (DAL) is set to report tomorrow morning, kicking off a series of major airline earnings over the next week. As we noted yesterday, DAL and other big airline stocks remain well below their 2023 highs, and it’ll be interesting to hear whether DAL executives still see as “robust” travel demand as they did late last year. Rising labor and energy costs remain a concern around the industry. Also, airlines are cyclical stocks, meaning they’re quite sensitive to any slowdown in the economy. United Airlines (UAL) and American Airlines (NASDAQ:) follow DAL next week.

Analysts expect overall Q1 earnings on the S&P 500® to decline an average of 6.6% from the same period a year earlier, which would represent the largest year-over-year decline since the second quarter of 2022, when COVID-19 lockdowns resulted in a 31.8% decline.

What to Watch

We’re a third of the way through this week’s key data releases as investors pore over CPI this morning.

: Tomorrow morning at 8:30 a.m. ET, participants get a look at March wholesale inflation in the PPI report. Analysts expect PPI to be flat month-over-month, and core PPI to rise 0.3%, Trading Economics says. PPI fell 0.1% in February and core PPI was flat, so estimates now are for a slight uptick but nothing too scary. As a reminder, PPI can sometimes be a good indicator of CPI down the road, because rising wholesale prices often get passed along to consumers. Also, PPI can be a useful indicator ahead of earnings season, because if wholesale prices rose sharply, they potentially weighed on company margins.

: This important indicator of consumer demand fell 0.4% in February, and much of recent data suggest the economy has gotten more sluggish since then. Will this show up in the retail sales figures? If so, it could be another warning sign for companies that depend on consumers showing up to drive revenue and earnings. Analysts expect that February’s retail slowdown extended into March with a drop in sales of 0.9%, according to consensus from Trading Economics. Meanwhile, The Atlanta Fed’s GDPNow tool now predicts 2.2% Gross Domestic Product (GDP) growth in Q1, up from the previous estimate of 1.5%.

When the going gets tough… How does one weather a market dip? It may be tough, but investors might want to consider staying the course, according to this new article from Schwab Insights and Education.

SPX Daily Chart

CHART OF THE DAY: CATCH-UP? The S&P 500 index (SPX-candlesticks) generally outpaced the small-cap index (RUT-purple line) over the last month, due in part to the banking crisis that hit smaller banks heavily represented in the RUT. Recently, small-caps have regained some momentum, and are closing the gap with their larger brethren. Data sources: S&P Dow Jones Indices, Russell. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Bank beats ahead? The biggest banks have a long history of exceeding Wall Street’s expectations, and analysts generally expect the behemoths of banking to hold their own as far as year-over-year earnings and revenue when reporting season begins Friday. A resilient U.S. housing market and generally strong consumer spending in Q1 may have helped the biggest banks, and volatile trading in the capital markets could support revenue in banks’ trading businesses.

Goliath slays David: Recession fears have held small-cap stocks in check lately. The Russell 2000® (RUT) small-cap index is up just 2% over the last month, compared with an 8% gain for the S&P 500® index (SPX). Small-cap stocks are often seen as more vulnerable to U.S. recessions than their large-cap counterparts because they tend to have a higher percentage of domestic sales. The RUT also has heavy exposure to the downtrodden banking sector. Keep in mind, however, that much of the recent SPX increase is due to out-performance by heavyweight info tech stocks. The SPX Equal Weight index (SPXEW), which gives all 500 stocks in the index an equal weighting, is up less than 5% over the last month.

Holding steady: Investors tracked by the TD Ameritrade Investor Movement Index (IMX-SM) didn’t budge much in March. The index held steady with February at 4.57. The auto industry saw some love in March, as popular stocks bought by TDA clients included Tesla (NASDAQ:), Ford (F) and Rivian (RIVN). Some of the stocks that saw selling from clients that month included Meta (META), Nvidia (NASDAQ:), and Advanced Micro Devices (NASDAQ:), which may reflect investors exiting some of the info tech stocks that had rolled up big gains earlier in the year. Apple (NASDAQ:) also drew sellers. “March was full of surprises, but the overall impact among TD Ameritrade retail clients when it came to exposure to the markets was neutral,” says Lorraine Gavican-Kerr, managing director of investor education at TD Ameritrade. “For the second month in a row, our clients were net buyers of equities, seemingly eyeing an opportunity to buy into the Financial sector’s lows and to sell off the highs in information technology.” The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors were doing and how they were positioned in the markets.

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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