Low Inflation Data Reduces Rate Hike Possibility: 5 Picks

On Apr 10, the Department of Labor released Consumer Price Index (“CPI”) data for the month of March. Although inflation rose by the highest percentage point in 14 months, the data was in line with the consensus estimate. Notably, core CPI, a key inflation metric, came below expectation.

Tamed inflation together with a robust labor market has compelled the Fed to continue with its dovish monetary stance. All these positives are likely to bolster market rally. At this stage, it will be prudent to invest in stocks with strong growth potential and a favorable Zacks Rank.

Benign Inflation Data

The CPI for March came in at 0.4%, in line with the consensus estimate. Year over year, the cost of living index increased 1.9%, below the Fed’s target rate of 2%. However, core CPI –- the key inflation metric, which excludes erratic price changes of food and energy –- rose 0.1% in March, below the consensus estimate of 0.2%. Year over year, core CPI declined to 2% compared with 2.1% in February. This marks the smallest yearly increase in core CPI since February 2018.

The last available data (released on Mar 29) for core personal consumption expenditures (PCE) price index rose 0.1% in January, less than the consensus estimate of an increase of 0.2%. The year-over-year rise in the PCE pride index was 1.8%, below the 2% target rate of the Fed. Notably, PCE price index is the Fed’s most-favored inflation gauge.

Decline in Government Bond Yields and Dollar Index

Following the release of March CPI data, yields on U.S. government bonds have declined. The yield on benchmark 10-year Treasury Note dropped 0.001% to 2.476%. Likewise, yields on long-term 30-Year Treasury Note decreased 0.003% to 2.901%. Yields on short-term 2-Year Treasury Note stayed flat at 2.327.  Similarly, yield on 3-Month Treasury Note declined 0.001% to 2.426%.

Lower-than-expected inflation data also had an impact on the dollar index. On Apr 10, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, decreased 0.02% to 96.93. Lower dollar price will make U.S. exports more competitive in the international markets.

Fed Reiterates Dovish Monetary Stance

On Apr 10, in its FOMC minutes, the Fed stated that the majority of its members have decided to stick to the central bank’s March decision of not hiking interest rate, signifying that the benchmark interest rate will remain within its existing range of 2.25 – 2.5%.

The U.S. labor market remains robust. Unemployment rate is at its 50-year low level of 3.8%. Job data for March also revealed that the average wage rate increased 0.14%. The wage rate increased 3.2% year over year in March.

Despite a record-low unemployment level and rising nominal wage rate, inflation remains within the target level of the central bank. This compelled the Fed to stick to its stand of not raising interest rate in 2019. A hike in interest may be considered at the end of this year if U.S. economic fundaments improve.  

Our Top Picks

The U.S. economy is likely to maintain its long-term growth albite at a slow pace. Consequently, investment in stocks with strong growth potential will be lucrative. Our selection is backed by a Growth Score of A and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks in the last three months.