Uncertainty is the watchword in Q2

With one quarter down, where do markets go next?

At its recent meeting, the Federal Reserve reaffirmed that it sees three rate cuts this year, but it also projected a stronger economy, with higher growth, slightly lower unemployment, and higher core inflation. Recent economic data show continued low weekly jobless claims, and consumers remain confident. In the University of Michigan consumer sentiment survey, consumers saw one-year inflation expectations fall from 3.0% to 2.9%, and 5-10 year expectations fall from 2.9% to 2.8%, likely music to the Fed’s ears, as inflation is not entrenched in consumers’ thinking. And February’s core personal consumption expenditure measure of inflation was slightly softer than expected, as the year-over-year measure eased lower, from 2.9% to 2.8%. Housing is recovering from the shock of higher interest rates and higher prices. The National Association of Realtors cited modest sales growth as slow and steady progress from the lows of last year, since ongoing job gains are clearly increasing demand along with more inventory. 

Further progress on getting inflation down sustainably toward the Fed’s 2% target will allow the Fed to cut its fed funds rate. Markets will now shift focus to first quarter corporate earnings and any guidance managements will be able to give on what they expect for the rest of the year. Seemingly always just below the surface are geopolitical risks and challenges that markets have been able to keep at arm’s length, but at some point, these could rise up. As the year progresses, election season will heat up, presenting another set of challenges. But for now, markets can take a break.