Capital markets perspective: Measure twice, cut once

Capital markets perspective: Measure twice, cut once 


When working with wood, there’s a saying that you should always measure twice before making a cut – an approach that the Federal Reserve also apparently took by repeatedly re-measuring and re-marking their line before firing up the saw. Their caution has probably saved the economy from a mistake. 

How do we know? Because once again, the line was off by one-tenth. Which line? Why, inflation of course: Prices at the consumer level advanced 0.3% in March, exactly 0.1% ahead of expectations.1 Those aren’t terrible numbers, and they were driven almost entirely by advancing services prices that might simply be playing “catch-up” with goods (which, after all, began surging almost immediately after the COVID lockdowns ended). But last week’s numbers still leave inflation about a percent and a half above where the Federal Reserve would prefer it to be.

Markets have been clamoring for cuts for a very long time, and it wasn’t very long ago (over the winter holidays, in fact) that markets were utterly convinced that the Fed would have already started trimming rates by now. Moreover, back then the idea of anything less than at least four or five cuts by year-end seemed ludicrous.2 But a third disappointment in four tries for the Consumer Price Index (CPI) so far this year has changed that math and hammered home the idea that Fed Chair Jerome Powell had a point when he said the labor market’s enduring strength had given the Fed the luxury of time: There is simply no reason to start cutting until the economy shows signs of tipping over or inflation is unambiguously tame. 

So thanks to another slightly hotter-than-expected CPI print, what were expectations for as many as six or eight Fed rate cuts by the end of this year had become, at most, one or two (or maybe three if you’re willing to stretch the chalk line tight enough). What’s more, expectations for the long-awaited start to the cutting cycle have been pushed out again, to July or even September (and there were even rumblings last week that the Fed’s next move might even be a rate increase – something the market is almost certainly completely unprepared for).

Markets were of course tuned into all this and spent Monday and Tuesday biding their time before Wednesday’s inflation numbers. But when they came, markets wasted little time selling off – two- and 10-year U.S. treasuries dropped immediately after the CPI was published, pushing yields for both securities to their biggest one-day jump so far this year. Similarly, the S&P 500 gapped lower when it opened. Even a relatively benign Producer Price Index report on Thursday3 was unable to make much difference, and both stocks and bonds lost ground for a second consecutive week.

Maybe this shouldn’t have been a surprise. After all, inflation has crept its way back into all sorts of survey-based data like the ISM and PMI reports that investors used to take mostly at face value but have recently sort of ignored. Regardless, the idea of a comeback for price pressure was repeated again last week when the National Federation of Independent Businesses reported that inflation had again leapfrogged a host of other concerns to once again become the top concern for small business owners as they look ahead to the coming year.4 Ditto for American consumers, who again ratcheted up their inflation expectations for the coming year (and the next 5-10 years, too) when pollsters at the University of Michigan asked for their views during the UofM’s closely followed consumer sentiment survey.5

It probably won’t shock you, then, to learn that both the NFIB and the UofM surveys registered weaker overall sentiment as well. Businesses and consumers are growing tired of persistent price pressures. That puts an even more ominous spin on last week’s data: Persistent price pressure accompanied by a dour outlook presents a challenge as we head toward summer.

Finally, a quick note about last Friday’s unofficial start to first-quarter earnings season: so far, so good. On Friday morning, Citigroup, JPMorgan, and Wells Fargo each beat analyst estimates and provided relatively upbeat guidance for the remainder of the year.6 Particularly impressive was the fact that loan loss provisions – rainy-day funds that banks set aside against expected future losses if their borrowers eventually default – were generally smaller than expected. If banks were really worried about a looming recession, they might well have gone the other direction and boosted those reserves. As it stands, though, we’ll take at face value the idea that banks are becoming perhaps a little more constructive on the macro – a welcome bit of good news.

What to watch this week

This week’s macroeconomic calendar will feature a retail sales report for March, a trio of reads on the health of the manufacturing economy and several releases relevant to housing. Of these, Monday’s retail sales data is probably the most significant: It will provide an important cross-check of last week’s University of Michigan sentiment data that showed the consumer is once again getting worried, as well as on-again/off-again evidence that demand is softening. So far, though, the U.S. consumer has proven resilient and it will be hard to argue that the economy is weakening until that changes. 

On the productive side of the economy, we’ll get our first two regional Fed manufacturing reports for April – Empire State on Monday and the Philly Fed on Thursday. Add to that Tuesday’s industrial production report and it should become a little easier to guess whether or not the recent return to growth in manufacturing activity hinted at by private-sector PMIs is for real. 

In terms of housing, our first two releases of the week will speak directly to the inventory crunch that continues to keep housing activity at bay: the National Association of Homebuilders builder sentiment index on Monday and housing starts/permits from the Census department on Tuesday. To say that tight inventories are constraining transaction volumes remains an understatement, and while neither of this week’s releases speak to the willingness of existing homeowners to hang a For Sale sign in their yard (for that, see the details of Thursday’s existing home sales release), builders can and often do play a significant role in the state of the housing market – not only by developing new properties, but also in tweaking the price point of homes they list for sale. Look for evidence of both in this week’s releases. 

Under “miscellaneous,” we should list Thursday’s Index of Leading Economic Indicators (LEI) among the interesting releases on tap for this week. The LEI famously back-tracked on its recessionary signal earlier this year when the Conference Board’s model emerged from its own “red zone” without a significant downturn. While it seems unlikely that this month will represent the next turning point, watching the LEI and the possible return of its predictive abilities could make for good sport.

Finally, first-quarter earnings will begin to capture an increasing share of the market’s attention this week when the second wave of big-bank earnings hits the wires, as Goldman Sachs, Morgan Stanley, Bank of America, Bank of New York and a handful of others report first-quarter results. As described above, Friday’s bank earnings were surprisingly good – watch this week to see if things like benign loan-loss provisioning and generally upbeat macro commentary continue to set the tone. For those interested in credit card spending as a read into the U.S. consumer, Discover and American Express also report this week.

Beyond banks, listen closely as a pair of transportation and logistics companies – rail operator CSX and trucking company JBHunt – report earnings and provide their operating updates this week. Transportation companies always provide an excellent window into consumer demand but are also uniquely positioned to weigh in on things like supply chain stress – something that is suddenly topical again given the inflationary environment and other international disruptions.

Finally, Dutch semiconductor equipment maker ASML and Taiwan’s TSMC are also on the earnings docket for this week. Semiconductor and semiconductor equipment companies are interesting for a host of reasons, not the least of which is the perspective they can provide into the geopolitical environment (particularly with regard to China), as well as the burgeoning world of AI.

Also, have a glance at Manpower, Inc.’s earnings release, due out Thursday. While the company’s relatively modest market cap doesn’t make it a likely contender for market attention, its significant footprint in temporary and contract employment services might make it particularly interesting if you, like me, are on watch for signs that the labor market might finally be softening.

Get the scoop on your money.

Stay current on planning, saving, and investing for life.

2, Empower Investments

6 Company reports, Bloomberg and

This material is neither an endorsement of any security, index or sector nor a solicitation to offer investment advice or sell products or services.  

The S&P 500 Index and S&P MidCap 400 Index are registered trademarks of Standard & Poor’s Financial Services LLC. The S&P 500 Index is an unmanaged index considered indicative of the domestic large-cap equity market and is used as a proxy for the stock market in general. The S&P MidCap 400 Index is an unmanaged index considered indicative of the domestic mid-cap equity market.

Russell 2000® Index Measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 Index and it represents approximately 8% of the US market. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. 


Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”). EAG is a registered investment adviser with the Securities and Exchange Commission (“SEC”) and subsidiary of Empower Annuity Insurance Company of America. Registration does not imply a certain level of skill or training.