The SPDR S&P 500 ETF Trust (NYSE:SPY) traded lower in a volatile four-day week as the latest batch of inflation data rattled Wall Street.
On Friday, the Bureau of Economic Analysis reported the personal consumption expenditures price index increased by 5.4% year-over-year in the month of January, up from 5.3% in December. Core PCE, which excludes volatile food and energy prices and is the Fed's preferred inflation gauge, was up 4.7%, above economist estimates of 4.3%.
Analysts expect S&P 500 companies to report negative overall earnings growth in the first two quarters of 2023, according to FactSet.
Broke below 50-day line, tested its 200-day line
In its latest meeting minutes released on Wednesday, Federal Reserve members said inflation "remained well above" its 2% target and more interest rate hikes will likely be necessary to bring it down. The Fed also noted the U.S. labor market "remained very tight, contributing to continuing upward pressures on wages and prices."
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said Friday the PCE data reinforces the idea that the Fed still has a lot more work to do to get inflation under control.
"It is far too early to extend duration and buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market," Zaccarelli said.
Jeffrey Roach, chief economist for LPL Financial, said investors can expect the stock market to remain choppy as the Fed continues to raise rates.
"The Fed may still decide to hike by 0.25% at the next meeting, but this report means that the Fed will likely continue hiking into the summer," Roach said.
Downtrend channel meets year-long resistance
Bill Adams, chief economist for Comerica Bank, said the stickier inflation is in 2023, the more aggressive the Fed will be with its tightening and the weaker the economy will be in 2024.
"Comerica’s next interest rate forecast will have the Fed raising the federal funds target to a peak level of 5.25%-to-5.5% in June, and holding it at that level until a first rate cut at the March 2024 decision," Adams said.
Investors will get key economic updates on Monday when Federal Reserve Governor Philip Jefferson delivers a speech to Harvard University students and on Wednesday when the Institute for Supply Management releases its February Manufacturing Purchasing Managers Index (PMI) reading.
Bullish pin bars from daily chart
The Federal Reserve is likely closely monitoring the PCE data ahead of its March meeting. The bond market is pricing in a 76% chance the Fed will raise interest rates by another 0.25% next month, bringing its fed funds target range to between 4.75% and 5%.
The Fed has been raising interest rates since early 2022 in an attempt to bring down inflation. Rising interest rates weigh on the valuations of risk assets like stocks and bonds, but falling bond prices have pushed bond yields higher.
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Trading Tips: The market weakness from strong data reports have produced lower lows lately. Looking at calls above 396.7 and puts under 395 on Monday.
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