Highlights for This Week Include:

The March ISM business surveys showed an encouraging jump in manufacturing activity while the larger service sector remains consistent with continued but slower growth. The Blue-Chip consensus is now calling for 2.0% first-quarter economic growth, while the Atlanta Fed GDPNow estimate is at 2.5%.

The Federal Reserve’s (Fed’s) preferred inflation gauge showed slower disinflation to start the year and suggests a longer time frame to meet the Fed’s 2.0% inflation target and delayed interest rate cuts.

The strong momentum for the S&P 500 index continued through March. The index gained 3.1%, with all sectors finishing with positive returns for the second straight month. We continue to favor cyclicals, led by technology-related industries, along with Energy, Financials, and Industrials.

Encouraging Signal from Manufacturing Survey while Service Sector Survey Remains Consistent with Growth

We pay close attention to monthly business surveys because they provide important and timely insight into the private sector economy. The ISM Manufacturing PMI jumped in March with the biggest increase in three years, pushing the index above the breakeven level of 50 for the first time since September 2022, and indicating growth in factory activity. Half of all 18 industries in the ISM survey, also the most since September 2022, expanded last month. Stronger breadth of industries signaling expansion is consistent with the sustainability of the current positive momentum.

The ISM Services PMI fell in March to a three-month low. However, it remains consistent with growth in services activity, but at a slower pace than at the end of last year.

Fed’s Preferred Inflation Gauge Suggesting Sticky Inflation

The Fed’s preferred inflation indicator, the personal consumption expenditures (PCE) price index, rose 0.3% m/m (2.5% y/y) in February, with the core index (excludes volatile food and energy) also up 0.3% m/m (2.8% y/y). Coupled with January’s readings, this resulted in the biggest back-to-back price growth in a year.

This stronger inflation momentum around the turn of the year suggests a longer time frame to achieve the Fed’s 2.0% inflation target. Amid slower disinflation and continued strong economic growth, the Fed has been signaling patience on when to expect interest rate cuts. Interest rate markets are still indicating around three 0.25% cuts later this year, but the risk now is for delayed or fewer rate cuts than markets are currently pricing in.

All S&P 500 Sectors Posted Gains in March

The strong momentum for the S&P 500 continued through March. The index gained 3.1%, with all sectors finishing with positive returns for the second-straight month. In an encouraging signal for both the stock market and economy, the economically sensitive cyclical Value sectors of Energy, Materials, Financials, and Industrials all outperformed the S&P 500