Stocks rally on earnings and despite sticky core PCE inflation

Wall Street does not want to let the S&P 500 bears win.  US stocks are holding onto gains after a mixed round of economic data locked expectations for the Fed to deliver one more rate hike and as banking concerns might allow them to signal they will hold going forward.  Overall earnings have impressed this week, with tech leading the charge.  Even with Amazon’s downbeat call that suggests weakness with cloud growth, optimism remains for a solid second quarter.  

The market has comfortably priced in a quarter-point rate hike by the Fed for the May 3^rd meeting, but the next several weeks could still support the argument that inflation is proving to be sticky.  Pricing pressures likely rose in April and if the consumer is bolstered by stronger wages and easing recession fears, the Fed may need to do more tightening. 

Banking jitters appear to be on a see-saw as Wall Street closely watches to see what happens with First Republic Bank.  It appears that hopes of a bank merger or a white knight are quickly fading.  It seems the likely fate for the troubled bank is that it goes into receivership.  US officials wanted the biggest banks to step in, but since we aren’t seeing contagion risks at the moment, it appears they are willing to let First Republic crumble here.  After contributing $30 billion in deposits to support First Republic Bank, the big banks are hesitant to waste anymore money. 

US Data

The Fed’s preferred inflation and wage data sealed the deal for next week’s rate hike. Inflation continues to head lower, albeit it is showing signs of slowing, while wages are rising. 4.2% inflation might be the slowest pace in almost two years but it is still too high. Wages and salaries for the private sector rose 5.1% from a year ago, a disturbing reading for economists who were looking to see stronger disinflation trends with core services.

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