Taxes, Inflation, and Skittish Markets

Taxes, Inflation, and Skittish Markets

Last week saw continued retractions in U.S. Equities and fixed income, with hotter-than-expected inflation curtailing market rate cut expectations. Gold and silver were left as winners, as inflationary pressures, in light of strong employment data, have broadly dulled the market optimism for a June rate cute. With earnings season just kicking off, companies’ Q1 results look to be the data points that could shift or reinforce the choppy equity landscape.

Last week, CPI and PPI brought muddied waters reinforcing sticky inflation and likely a more hawkish FED interest rate path this year. CPI printed on Wednesday coming in hotter than expected, with March Core CPI1 at 0.4%, over the expected 0.3%, and March Headline CPI1 also at 0.4%, over the expected 0.3%. With the first three months of the year having hot CPI prints, the concern facing markets is that inflation is not only sticky, but has potential to reaccelerate, particularly if interest rates were to ease. The continued trend is dispelling hopes that the January and February heightened CPI prints were due to seasonal pricing pressures, as retailers adjust prices at the start of the new year. PPI, a production side measure of inflation, saw Headline PPI1 come in below expectations at 0.2%, under the expected 0.3%, and Core PPI1 came in at expectations of 0.2%. PCE, the FED’s preferred metric for inflation, has the most sway on policy direction, and the lower PPI level compared to CPI could be showing a path where March PCE (expected 4/26) comes in lukewarm. Only time can show us where inflation goes, but markets left the week thinking a June rate cut is unlikely.

Weekly Performance

Data Source: Factset®        Performance Period:      4/8/2024    4/12/2024

Earnings start coming in quickly, this week, and more Financials/Banks report next week with the hope of turning the tides on the sector’s sluggishness of late. GS, BAC, and KEY are on deck with JPM, C, WF, and MS reporting disappointing results last week. Thematically, net interest income is under pressure, as prolonged high interest rates are raising bank funding costs significantly. After the contained banking crisis last year started by SVB and this year’s headwinds at NYCB, continued interest rate pressures seem to have left banks listing from wave to wave. That said, we believe market overreactions in the sector may create islands of opportunity.

The week starts with “Tax Day,” where many last-minute filings and extension requests are commonplace. In conjunction with that freneticism, we expect to see some tax-driven market flows outward, as cash-light taxpayers sell positions to raise funds and pay Uncle Sam. After the tax time “dust” settles, we expect to see some easing of selling pressures for recent underperformers. Not many love taxes, tax time, or much of what is associated with them, and that’s nothing new. Christ dealt with rendering unto Caesar what is Caesar’s, but His teachings on paying what is owed extend well beyond taxes. “Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed” (Romans 13:7).

1. Seasonally Adjusted Month over Month
Sources: Yahoo Finance,, and JP Morgan Market Insights

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