Lukewarm Economics

Investment Insights: Market Update
  • March inflation results were in-line with expectations, rising at a 5.0 percent annualized rate.
  • Improving consumer prices and an organic tightening in financial conditions are paving the way for the Fed’s tightrope walk.
  • The banking system remains robust, though select debt areas could see growing risks.
  • Stocks have seen a relief rally, but volatility could return as forecasts come to a head.

The Consumer Price Index reported an increase in line with expectations, showing inflation increased at a 5.0 percent annualized rate in March. Despite this latest sign of a slowing inflation rate, the Federal Reserve is unlikely to retreat from a forecasted 0.25 percent hike at its May meeting. Meanwhile, components of inflation closely watched by investors and consumers, including housing and grocery store prices, cooled a bit. Interestingly, the core CPI metric—which excludes traditionally more volatile food and energy prices—remains elevated, up 5.6 percent from a year ago. This could pose a concern for policymakers who are walking a tightrope between tightening financial conditions and stubbornly high inflation metrics.

US Treasury Secretary Janet Yellen downplayed the recent banking sector consternation, pointing toward economic strength on a worldwide scale. As we have noted in the past, bank runs and the containment thereof come down to confidence and rhetoric around the banking sector’s soundness and backstops. According to Yellen: “The US banking system remains sound, with strong capital and liquidity positions. The global financial system also remains resilient due to significant reforms that nations took after the financial crisis.” However, we still see some potential risks to small and mid-sized banks if the economy continues to slow and as previous and future rate hikes work their way into the financial system. Banks holding a larger portion of commercial real estate loans could come under pressure during an economic slowdown, particularly if occupancy rates dwindle in the post-COVID work environment.

Despite obstacles, stocks have seen a nice relief rally as inflation moderates and investors anticipate an end to the recent hawkish policy. The S&P 500 is now up over 7 percent so far this year on the expectation that monetary policy could pivot in the coming months. Financial markets may be a bit ahead of themselves, however, as economic numbers—particularly in the labor market—reduce recessionary worries. A soft landing is still a definite possibility, with the Fed keeping a keen eye on the data and the financial system as a whole, and doing some organic slowing on its own via tighter lending standards. Volatility is likely to remain high throughout this year, particularly if forecasts for easing policy and recession probabilities persist. For now, prudent positioning remains supreme until a solid indication emerges on rates or the economic picture.

Market Dashboard

Financial market data for various time periods covering global asset classes. Data as of April 11, 2023.

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Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
Chief Investment Adviser