Implications of Recent Economic Reports on the Federal Reserve’s Decision-Making Process

Updated On: February 16, 2024 4:49 pm

Three significant economic reports have emerged this week, casting a shadow over the highly anticipated rate cut decision by the Federal Reserve. The outcome of these reports holds sway over the Federal Reserve’s stance on cutting rates.

The recent earnings announcement season has been nothing short of spectacular. The majority of S&P 500 companies exceeded analysts’ earnings expectations, propelling the S&P 500 to unprecedented heights. The market euphoria seemed undeterred until focus shifted to the latest inflation reports and January U.S. sales results.

As we delve into the details of the diverse economic data reports, we seek to unravel their impact and contemplate what might lie ahead.

Pertinent Inflation Data

Consumer Price Index (CPI)

The data unveiled a lesser-than-anticipated cooling of inflation. While headline CPI rose slightly higher than expected, marking a 3.1% increase over the past 12 months, it was down from December. Core CPI, which excludes food and energy, displayed a marginally higher increase than forecast, hovering at 3.9% for the past 12 months.

Of particular concern is the persistent surge in Owners’ Equivalent Rent (OER), contributing to two-thirds of the CPI. OER’s 6% rise over the last 12 months exacerbates high shelter costs, propelling the CPI upwards. Although slightly surpassing expectations, the CPI report was largely positive, yet it triggered a sharp market selloff, with the S&P 500, Dow, and NASDAQ plummeting.

U.S. January Retail Sales

The January retail sales report delivered a significant blow as it lagged across multiple categories, culminating in a colossal 0.8% decline. Nearly two-thirds of the retail sales categories reported decreases from the previous month, showcasing a pervasive weakness, especially in building materials and miscellaneous stores. This underwhelming performance was aggravated by the Commerce Department’s downgrade of December’s retail sales numbers.

While this downtrend is disheartening, it’s essential to recognize that this decline is only the second in the past 10 months. Nevertheless, the harrowing report could spur the Fed to consider initiating rate cuts at an earlier juncture.

Producer Price Index (PPI)

The Producer Price Index (PPI) report for January portrayed inflationary upsurge, surpassing economists’ expectations. Core PPI, excluding food, energy, and trade margins, witnessed a 0.6% surge in January and a 2.6% increase over the past 12 months. The report portrayed a worrying surge in wholesale service costs, juxtaposed against declining wholesale goods costs.

China’s deflationary influence on the U.S. economy is palpable, with imports of deflationary pressure adding an extra layer of complexity for the Fed. China’s downward trajectory, announced by their National Bureau of Statistics, augments the global deflationary impact, requiring careful consideration by the Federal Reserve.

Assessing the Impacts

Evaluating the Rate Cut Timeline

The prevailing question is whether the Federal Reserve will instigate key interest rate cuts in May or June. Based on this week’s data, June is appearing to be the more likely scenario. However, market rates are pivotal to this decision, especially considering the divergence between the 10-year Treasury yield and the federal funds rate.

Significantly, numerous economists are voicing concerns about the Fed’s restraint in monetary policy. Dissatisfaction – as evidenced by a poll from the National Association of Business Economics – is at its highest since 2011, with 21% of respondents believing that the Fed’s stance is excessively restrictive.

Observing the trajectory of the Fed’s preferred indicator, the Personal Consumption Expenditures (PCE) index, inflation seems to be approximating the target range over the last seven months. The incremental decrease in inflation and its convergence towards the Fed’s 2% annual target rate in June ought to nudge the Fed to consider an earlier rate cut.

While the economic reports depict a slightly turbulent landscape, they also present opportunities for reflection and vital decision-making. Investors now find themselves at the nexus of uncertainty and anticipation, eagerly awaiting the Federal Reserve’s pivotal move in the coming months.

Reliance Steel & Aluminum Co. – A Strong Player in the Metals Company

Staying Ahead with Fundamentally Superior Growth Stocks

Amidst the buzz of major economic reports, the spotlight remains fixed on fundamentally superior stocks. These equities are the ones surpassing analysts’ forecasts, driving the quest for profits in a fundamentally oriented investing environment. In the midst of such pursuits, Growth Investor stocks have emerged triumphantly.

How to Navigate for Profits

Take, for instance, Reliance Steel & Aluminum Co. (RS), a distinguished powerhouse in the metals landscape. Specializing in metal processing services and the distribution of over 100,000 metal products globally, the company released its Q4 earnings results on February 15.

The report unveiled earnings of $4.73 per share and sales of $3.34 billion, significantly outstripping analysts’ projections of $3.92 per share on $3.3 billion in revenue. Notably, this marked a 20.7% earnings surprise and a slight sales surprise. For fiscal year 2023, the company’s earnings stood at $22.62 per share with sales amounting to $14.81 billion, notably surpassing expectations for earnings of $21.78 per share and sales of $14.78 billion.

In the wake of these stellar results, RS surged over 15% to reach a new 52-week high, further cementing its position with yet another 52-week high. Standing tall is my recommendation of RS dating back to April 2022, as the stock has impressively soared by about 66%, outperforming the S&P 500’s 16.6% gain during the same period.

Moreover, with an A-rating in Dividend Grader and a B-rating in Portfolio Grader, RS stands at the intersection of income and growth, making it a formidable force in the market.

Therefore, the path to lucrative portfolio positioning lies in focusing on stocks that deliver robust earnings and sales, a directive that continues to drive Wall Street’s investment decisions.

If determining where to direct your attention seems daunting, consider the arsenal of Growth Investor stocks. RS is not an isolated case; a majority of Growth Investor stocks from my portfolio continue to outshine expectations, fueling a surge in the aftermath of their earnings victories.

Embrace this opportunity today to gain complete access to my Growth Investor Buy Lists, alongside Monthly Issues, Weekly Updates, Special Market Podcasts, and Special Reports.

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Sincerely,

Louis Navellier