The S&P 500 Runs Out of Steam Amid Stagflation Concerns

The stock market experienced a loss of momentum while bond yields increased in response to data indicating a slowing economy amidst persistent inflationary pressures, posing a challenge to the Federal Reserve's outlook on potential rate cuts.

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Equities displayed volatility following a report revealing a decline in US consumer sentiment to a six-month low, coupled with an uptick in short-term inflation expectations. While a slowdown in crucial sectors of the economy has fueled speculation of monetary policy easing, several Fed officials have reiterated the notion of enduring elevated inflation levels as they endeavor to steer inflation back to the central bank's 2% target.

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Jeff Roach of LPL Financial remarked, "The Fed is walking a tightrope as they balance both mandates of price stability and growth." He added, "Although it’s not our base case, we do see rising risks of ‘stagflation’ — a concern the markets will have to deal with."

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The S&P 500 remained close to 5,220, poised for its third consecutive week of gains, marking the lengthiest winning streak since February. The Dow Jones Industrial Average saw an eighth successive session of gains. While most megacaps experienced declines, Nvidia Corp. interrupted a three-day downward trend.

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Meanwhile, Treasury 10-year yields rose by five basis points to 4.50%, while the dollar fluctuated.

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Chris Zaccarelli of Independent Advisor Alliance emphasized that despite inflation dominating much of the year's economic discourse, consumer spending remains the primary pillar supporting the economy. He cautioned, "Today’s lower-than-expected consumer sentiment numbers are a warning sign that the consumer shouldn’t be taken for granted." Zaccarelli further highlighted the rise in inflation expectations, stating, "In addition, inflation expectations have been rising as well, which is a double whammy for the Fed."

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Zaccarelli suggested that if spending decelerates while inflation surges, it would negate the desired Goldilocks scenario and place the Fed in a challenging position of balancing a slowing economy against escalating inflation expectations.

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Fed Bank of Dallas President Lorie Logan cautioned against premature consideration of lowering borrowing costs, citing disappointing inflation data in the initial months of the year. Governor Michelle Bowman advocated for a cautious and deliberate approach as policymakers work towards achieving the 2% inflation target.

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Chair Jerome Powell, speaking after the central bank's April 30-May 1 meeting, indicated a likelihood of maintaining high rates for an extended period, expressing uncertainty about the timeline for gaining confidence to enact rate cuts.

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