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Equity Markets Continue in a Choppy Range!

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KR Opinion

The financial markets have recently showcased their sensitivity to reports and speculative discussions, particularly regarding the Federal Reserve's potential interest rate adjustments. This sensitivity was highlighted by the debate on whether new Producer Price Index (PPI) data might lead the Federal Reserve to consider lowering interest rates.

This discussion gained momentum when the market surpassed a critical pivot point of 4.27, ultimately closing at 4.298. This event marked a significant shift in market forecasts, reflecting the dynamic nature of financial markets over a short period.

In terms of market performance, the equity markets experienced a notable sequence of events yesterday. Beginning with a sharp downturn to significant lows, followed by a robust recovery in the closing stages, this pattern illustrates not only the market's resilience but also its underlying upward momentum despite the presence of downward risks.

It has become a consistent observation that whenever the market approaches the higher to mid-range of the 5100 level, it experiences a strong rebound, indicating its capacity to withstand volatility.

As the week progresses, attention turns towards the upcoming release of the University of Michigan sentiment indices and industrial production data. The impact of these figures remains uncertain, though market participants keenly await them.

The recent PPI report, which indicated a month-over-month increase nearly double the expectations, led to a swift sell-off in equities and a significant drop in treasury bond prices, underscoring the market's reactive nature to unexpected economic indicators.

The market's behavior has consistently demonstrated a tendency to oscillate within a defined trading range, a phenomenon that has been a focal point of discussion for the last three weeks. Any attempts to breach the boundaries of this range have been met with a swift return to its confines.

In the broader market context, the S&P has managed to outperform the NASDAQ, while the mid-cap sector, despite lagging behind, has shown promising signs of opportunity. This sector's performance is noteworthy, especially in comparison to the Russell index, which continues to struggle due to the presence of underperforming 'zombie companies' and negative sentiment surrounding the banking sector.It was a downbeat day for the stock market.

Looking Back on Yesterday’s Action

The S&P 500 (-0.3%), Nasdaq Composite (-0.3%), and Dow Jones Industrial Average (-0.4%) closed off their session lows thanks to moves higher in the last 30 minutes of trading, albeit still logging broad-based declines. The Russell 2000 underperformed the broader market, sinking 2.0%. 

The main focus was price action in the Treasury market, which pushed yields toward their February highs. The 2-yr note yield rose seven basis points to 4.69%, and the 10-yr note yield settled 11 basis points higher at 4.30%. This was largely in response to the February Producer Price Index report, which was hotter than expected.

This morning's data also contributed to the selling, including a February retail sales report that was a bit weaker than expected but still up nicely versus the prior month and some initial and continuing jobless claims data that reflected ongoing strength in the labor market.

Downside moves were relatively modest despite a growing sense among some participants that stocks are due for a pullback. The Invesco S&P 500 declined 0.9%, and only one of the 11 S&P 500 sectors fell more than 0.8%.

The rate-sensitive real estate sector (-1.6%) was the worst performer, followed by the utilities (-0.8%) sector. Meanwhile, only two sectors finished higher today. The energy sector jumped 1.1%, benefitting from the positive movement in WTI crude oil futures ($81.23/bbl, +1.49, +1.9%) and natural gas futures ($1.74/MMBtu, +0.08, +4.8%). 

Gains in some heavily weighted names supported the broader market, but it wasn't enough to offset the broad declines elsewhere. Apple (AAPL 173.00, +1.87, +1.1%), Microsoft (MSFT 425.22, +10.12, +2.4%), Amazon.com (AMZN 178.75, +2.19, +1.2%), and Alphabet (GOOG 144.34, +3.57, +2.5%) were influential winners in that respect. 

- Stock Market Performance Year-to-Date (YTD):

  - S&P 500: +8.0%

  - Nasdaq Composite: +7.4%

  - S&P Midcap 400: +5.2%

  - Dow Jones Industrial Average: +3.2%

  - Russell 2000: +0.2%

Thursday’s Economic Data Review:

- February Producer Price Index (PPI):

  - The PPI rose by 0.6%, compared to the KR Forecast prediction of 0.3%. The previous month's PPI was 0.3%.

  - The core PPI (excluding food and energy) increased by 0.3%, against the KR Forecast expectation of 0.2%. The previous month's core PPI was 0.5%.

  - The report highlights that the rise in goods prices was the main driver of the PPI increase. Additionally, the surge in PPI suggests concerns over persistent Personal Consumption Expenditures (PCE) inflation, possibly leading the Federal Reserve to maintain higher interest rates for longer.

- February Retail Sales:

  - Retail sales increased by 0.6%, slightly below the KR Forecast projection of 0.7%. The previous month was adjusted to a decrease of 1.1% from an initially reported -0.8%.

  - Excluding automobiles, retail sales rose by 0.3%, compared to the KR Forecast prediction of 0.5%. The prior month was adjusted to a decrease of 0.8% from -0.6%.

  - The report's main takeaway is the recovery in sales, which addresses some concerns following the decline in January. This rebound supports the market's expectation of a soft economic landing.

- Weekly Jobless Claims:

  - Initial claims were 209K, lower than the KR Forecast estimate of 219K. The previous week's number was adjusted to 210K from 217K.

  - Continuing claims stood at 1.811 million; the prior week's figure adjusted to 1.794 million from 1.906 million.

  -The data indicates a robust labor market, underscored by the low initial claims—a leading unemployment indicator—and the significant improvement in continuing claims.

This week's data also incorporates the annual adjustment to seasonal factors affecting unemployment claims from 2019 onwards.

- January Business Inventories:

  - Business inventories remained unchanged at 0.0%, versus the KR Forecast expectation of a 0.3% increase. The prior month was revised to an increase of 0.3% from 0.4%.

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