Signs of “Disinflation” Hold Stocks High

Conflicting Signals: The Uncertain Outlook for the US Economy and Oil Prices

Some energy analysts are forecasting oil prices will hit $100 a barrel or more by this summer with supplies expected to be tight heading into the second half of the year. Before the new production cuts were announced, some energy insiders were already anticipating the global oil market could be in a supply deficit by late summer.

Others, however, believe slowing economies in the US and elsewhere will keep a lid on gasoline demand, which in turn would help hold down pump prices. Whether the US economy is headed toward a full blown recession is another heated point of debate with most of the data for February sending conflicting signals. Economists are hoping to get a clearer picture of how things are trending as March data starts rolling out this week.

ISM Indexes Analysis and Possible Impact

The ISM Manufacturing Index released yesterday did show a larger-than-expected decline in activity in March with the gauge still firmly planted in “contraction” territory. Bulls were excited to see a drop in the prices paid component, which fell to 49.2 from 51.3 previously. However, that is still nearly +20 points higher than it was in December 2022, indicating that inflationary pressures remain entrenched at the wholesale level.

The ISM Services Index on Wednesday may actually have more market impact as the Federal Reserve has consistently singled out climbing wages in the sector as a key driver of inflation. The prices paid component in February slowed -2.2 points but remained above 60, a level it hasn’t dipped below since late 2020.

Bulls are hopeful that more meaningful signs of “disinflation” will continue to appear as more March data is released, in turn supporting the idea of a Fed rate hike pause following the May 2-3 policy meeting.

Bears aren’t convinced that a Fed pause will do much to benefit stocks longer term if the US does slip into recession later this year, which bears definitely believe is going to happen as consumers will begin to buckle.

In Conclusion

Also, keep in mind, lower interest rates by the Fed does NOT guarantee a stock market rally. The Fed went on a rate hiking spree from 2004 to 2006. then paused between August 2006 and August 2007, then it started aggressively lowering rates at every meeting for the next 18-months, through December 2008.

For historical stock reference, the S&P 500 peaked in October 2007, just a couple of months AFTER the Fed started cutting rates, then proceeded to collapse until it finally bottomed in March of 2009, which followed an entire rate cutting cycle.