Month: March 2024

As the second quarter approaches, Citigroup equity strategists anticipate a shift in the US equity rally, predicting it will extend to more defensive market segments, especially those influenced by interest rates. 

The S&P 500 has overshot our 5100 year-end target reflecting soft landing and AI enthusiasm,” Citi strategists said in a note.

“… [Y]td price action has run valuations higher, implying a burden on fundamental growth follow through.”

Citi’s analysis suggests a modest overweight in growth sectors, despite downgrading the technology sector to market-weight due to mixed prospects within its subsectors. Specifically, the software segment, which includes giants like Microsoft (NASDAQ:MSFT), is retained at Overweight.

However, semiconductors, represented by companies like Nvidia (NASDAQ:NVDA), are kept at Market Weight. Finally, hardware, with Apple (NASDAQ:AAPL) as an example, is downgraded to Underweight, affecting the overall technology sector’s positioning.

Elsewhere, the consumer discretionary sector is elevated to Overweight, buoyed by upgrades in the auto sector. Retailers like Amazon (NASDAQ:AMZN) and the durables/apparel segment continue to be strong, reinforcing the sector’s bullish outlook. 

Conversely, financials are adjusted to Market Weight with a balanced view: banks retain an Overweight rating, but insurance, despite performing well in a hawkish Federal Reserve cycle, is downgraded to Underweight.

The strategists have also warned about the sustainability of the current market rally. 

“The Levkovich Index has just hit a “euphoria” reading,” strategists added.

The Levkovich Index is Citi’s sentiment gauge that follows everything from margin debt to short interest to the put-to-call ratio.

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) -The latest U.S. inflation data is “along the lines of what we would like to see,” Federal Reserve Chair Jerome Powell said on Friday in comments that appeared to keep the central bank’s baseline for interest rate cuts this year intact.

The personal consumption expenditures (PCE) price index data for February, which was released on Friday, “is what we were expecting,” Powell said, and even though the numbers showed less of a slowdown than last year, “you won’t see us overreacting.”

The data last month were “not as low as most of the good readings we got in the second half of last year, but it’s definitely more along the lines of what we want to see,” Powell said during an appearance at the San Francisco Fed where he was interviewed by Kai Ryssdal of public radio’s “Marketplace” program.

Powell’s comments were in line with his remarks after the Fed’s policy meeting last week, in which he said higher-than-expected inflation in January and February had not changed the sense that price rises would keep falling this year to the central bank’s 2% target.

U.S. Commerce Department data showed the PCE price index increased at a 2.5% annual rate in February, up from 2.4% in the prior month. The number excluding volatile food and energy prices rose 0.3% on a month-to-month basis, slightly faster than Powell anticipated when he said last week that February core inflation would be “well below” 0.3%.

Still, the Fed chief indicated the February report did not undermine the central bank’s baseline outlook.

Some details of the PCE data, economists noted, showed improvement in aspects of inflation that the Fed considers important, even as the headline numbers have shown little progress in the first two months of the year.

The central bank last week held its benchmark overnight interest rate steady in the 5.25%-5.50% range and also reaffirmed – narrowly – a baseline projection that the rate will fall by 0.75 percentage points by the end of this year.

The Fed is expected to hold rates steady, as it has since July of last year, at its April 30-May 1 policy meeting.

Policymakers by then will have received inflation and jobs reports for March, and the initial gross domestic product growth estimate for the first three months of the year.

While Fed officials have been careful to say they don’t put much weight on any single month’s data, the March readings could have an outsized bearing on their policy discussion if they confirm – or perhaps even more if they contradict – an anticipated job and wage growth slowdown and a cooling of housing inflation.

Economists polled by Reuters expect the March jobs report, which will be released next week, to show continued strong payroll growth, with 200,000 jobs added, but with annual wage growth, at 4.1%, hitting its slowest pace since June 2021.

Powell in recent weeks has had to reconcile expectations for rate cuts to begin this year with data showing improvement in the inflation number had slowed to start the year.

“We need to see more” progress on inflation before cutting rates, he said on Friday. “The decision to begin to reduce rates is a very, very important one … The economy is strong right now, and the labor market is strong right now. And inflation has been coming down. We can and we will be careful about this decision because we can be.”

Citigroup strategists expect the Federal Reserve to start cutting interest rates in June, the bank said after the Personal Consumption Expenditures (PCE) for February was relesed today.

Citi’s projections are now more in line with the Federal Reserve’s expectations for the upcoming easing cycle. In a research note, the strategists said they expect Chair Jerome Powell to maintain a dovish stance despite recent hawkish signals from other Fed officials.

The bank’s economists are closely monitoring inflation dynamics, with particular focus on the core PCE price index, the Fed’s favored inflation metric as it directly tracks how much Americans spend on less volatile items.

Core PCE inflation in February rose 0.26%MoM and was revised higher to 0.45% in January.

“We expect a stronger ~0.30% increase in core PCE in March given stronger medical and financial services,” Citi’s economists said in a separate note. 

Citi’s analysis follows remarks from Federal Reserve Governor Christopher Waller, who indicated that stronger inflation readings could be a barrier to kicking off rate cuts early. He outlined how the central bank could return inflation to its 2% target without the typically associated rise in unemployment.

That said, the contrasting perspectives within the Federal Reserve highlight the challenge of navigating between inflation risks and indicators of a cooling labor market. Despite recent increases in inflation data, Powell’s attention stays on the overarching theme of disinflation, indicating that he is ready to relax monetary policy further if inflation continues to moderate. 

Citi is also predicting a slowdown in job growth for March with estimates to create 150,000 new jobs, a decrease from the robust figures seen in previous months. This anticipated deceleration, together with additional signs of a softer labor market, underpins the case for upcoming rate cuts as a strategy to support economic stability. 

“We continue to expect officials will have enough evidence in inflation data to justify rate cuts starting in June, and that weaker labor market data will lead to 125bp total of cuts this year,” the team of analysts added.