Friday's Market Minute: Equities Rally as Inflation Continues to Ease

Equities closed higher yesterday as inflation continues to ease. The headline CPI index fell from 7.1% to 6.5% as fuel prices tumbled over 9.0% month over month and by 1.5% from a year ago. New and used vehicles also posted declines from a month ago, while shelter and apparel posted strong gains. Inflation isn’t necessarily broadly coming down, but it is stabilizing as the economy starts to feel the impact of the Fed’s aggressive rate hikes.

Investors are feeling more confident about another downshift in tightening by the Fed as disinflationary trends are intact, assisted by lower energy costs. There is more confidence in a Fed that will further slow the pace of its interest rate rises with a 25-basis point increase at its next policy meeting at the end of the month. 

One factor holding back continued enthusiasm in market rallies is perhaps due to slowing inflation that is already embedded in markets. Another take on why the market may fade the current counter trend rally is economic sluggishness as consumers exhaust savings, tighten spending habits, and the negative wealth effect of a housing market that has clearly softened.

The long nightmare of endlessly soaring inflation and an extremely hawkish Federal Reserve might finally be coming to an end. However, the economy may now be hindered by lackluster consumer confidence, higher unemployment, anemic growth, and a stock market that may retest or overthrow the 2022 lows before all is said and done.

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