Stocks and Bonds Fall on Inflation Data; Awaiting Fed Meeting

The Dow (-0.0%), NASDAQ (-0.7%), and S&P 500 (-0.1%) each fell for the week.  Meanwhile, taxable bonds slid about 1.3%, while tax free municipal bonds lost about 0.1%.  The 10-year Treasury yield rose 0.23% to end the week at 4.31%, causing the bond market to lose value.

Two inflation reports last week came in higher than expected, and retail sales came in weaker than expected.  The combination of these data sent the markets down modestly last week.   The Consumer Price Index (CPI – the most commonly known inflation measure) rose 0.4% over the prior month, above economists’ expectations, and slowing the trend of a decreasing inflation rate.  See the attachment for a chart showing inflation since 2015.  The Producer Price Index (PPI – another measure of inflation) also came in higher than expectation.  From an economic perspective, retail sales came in lower than expected and, adjusted for inflation, were down over the past year.  This suggests that the consumer is beginning to show signs of weakness.

All eyes and ears will be on the Fed, as the March meeting concludes on Wednesday.  It is widely anticipated that the Fed won’t hike or lower rates, but investors will be paying close attention to the Fed speech afterward.  Further, this meeting also marks the “dot-plot”, which is the Fed’s view of where the members expect rates to be at different points of time in the future.  Hence, that will provide investors with a better idea of the Fed’s intentions for raising or lowering interests, how often, and approximately when.  In our opinion, this is a lot of “noise” that will create above average volatility, but has little to do with the fundamentals that drive stock prices.  This has more of a direct impact on the bond market.

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