Yesterday’s inflation report showed the highest year-over-year reading in almost three years. Even after stripping out energy prices, core PCE is sitting at a multi-year high. But investors have still been looking through the data and leaning into the tech trade, observes Bret Kenwell, US investment analyst at eToro US.
The Federal Reserve has already taken on a more hawkish posturing in response to higher inflation. Yes, the consumer has remained fairly resilient, as recent earnings commentary has shown. But the longer inflation stays elevated, the greater the risk that it eventually has a more lasting impact.
Source: Trading Economics
The concern now is whether higher energy prices begin to filter into non-energy categories, making inflation harder for both consumers and the Fed to look through. On the GDP front, the second reading for first-quarter growth again came in below expectations. Personal consumption — the bulk of the report — was revised slightly lower from the initial reading.
The knee-jerk reaction may be to assume softer growth pushes the Fed in a more dovish direction, but sticky inflation could put the committee in a bind. With the Nasdaq 100 up more than 30% from its lows and the S&P 500 Index (^SPX) looking for its ninth straight weekly gain, stocks could certainly use a healthy breather.
