Cooler CPI Report Signals the End of “Good News is Bad News”

Today’s CPI report for March 2023 showed a .1% increase in prices from February, a considerably slowed pace of inflation. This was a reduction to a 5.0% increase year over year, which is down from a high of 9.1% last summer, but still well above the FED’s target of 2%. While the FED has continued to raise short-term rates to calm inflation over the previous year, better than expected positive data such as strong jobs growth and retail sales have been considered bad news to the markets as they provide ammunition to the FED to continue to raise rates. This “good news is bad news” phenomena is about to come to an end.

With the rate hikes expected to end soon or possibly might have already, the stock market’s sentiment now shifts to how actual data influences the economy, not as much how the FED will react to it. Assuming there is not a reversal in CPI, we are at or near the terminal FED funds rate and the stock and asset markets will pay more attention to corporate earnings, GDP, and jobs in the currently shaky economy. Additionally, last month’s pressure on the banking system will likely result in reduced lending, further curtailing growth. Negative news in the form of lower than expected earnings, higher than expected unemployment, and negative GDP data will cause the markets to go down. Rate cuts will come, but probably not immediately so there is no need for the markets to assign an opposite meaning to positive or negative news.

The “good news is bad news” mentality will shift to “bad news in the economy is bad news for corporate and asset valuations” because good news should no longer result in further tightening. I’m not really expecting much good news in the economy in the near term. By and large, earnings will disappoint and further job losses will occur. The exception might be residential real estate, which should recover faster than stocks with bond yields heading lower as investors flee stocks as well as lower inflation expectations, leading to lower interest rates. Better affordability providing opportunities for pent-up demand and a larger number of motivated sellers will lead to increased transactions and a more healthy real estate market by later in the year. This might not mean price increases in the short term, but we’re probably near the bottom now.