Stocks End Q1 on High Note

Investors celebrated a lower-than-expected reading on the Federal Reserve's preferred inflation gauge by driving major U.S. stock indexes higher Friday, the last trading day of the first quarter.

Sentiment got a boost after reports that the personal consumption expenditures (PCE) index rose 0.3% in February, a little below the 0.4% economists were expecting, and 5% from the same month a year ago. Core PCE inflation, which excludes volatile food and inflation prices, was also up 0.3% from the previous month and 4.6% from a year earlier. PCE and core PCE both rose 0.6% in January from the month before.

"The 0.3% monthly increase in core PCE was a step in the right direction but suggests the path to 2% inflation will still likely be long and bumpy," says Collin Martin, a fixed income strategist at the Schwab Center for Financial Research.

While the annual increases in PCE are still above the Fed's 2% inflation target, investors have generally welcomed any evidence the central bank's interest rate hikes over the past year are taking some heat out of the economy. The hope is that the Fed might become less aggressive after raising its benchmark lending rate roughly five percentage points in such a short span.

"Fed officials suggest more work still needs to be done, but the markets aren't convinced yet," Collin adds. "With roughly five weeks until the rate-setting committee's next meeting in May, there's plenty of time for expectations to change based on incoming economic data."

Stocks have now ended higher for three straight weeks, in a late burst of momentum for a volatile quarter rocked by concerns about a banking crisis that felled several U.S. regional lenders as well as general worries the Fed's rate increases could lead the economy into recession. With Friday's gains, the broad-based S&P 500® Index ended the first quarter roughly 7% higher (though it's still well below its December 2021 peak) and the tech-focused Nasdaq Composite was up more than 17%. The blue-chip Dow Jones Industrial Average has lagged a little and ended slightly above where it started the quarter.

Here's how the major indexes performed Friday.

• The S&P 500 Index rose 58 points (1.44%) to 4109.05; the Dow Jones industrial average was up 415 points (1.26%) at 33274.15; the Nasdaq Composite was up 208 points (1.74%) at 12221.91.

• The 10-year Treasury yield slipped seven basis points to 3.482%.

• Cboe's Volatility Index was down 22 basis points (1.16%) at 18.78.

Data updatesThe University of Michigan said its consumer sentiment index fell in March to 62 from 67 in February, representing its first decline in four months. Economists polled by Dow Jones expected a decline to 63. The university said its data "revealed multiple signs that consumers increasingly expect a recession ahead."

Inflation expectations for the year ahead also fell to 3.6% in March from 4.1% the month before, which could be a welcome sign as expectations of faster price gains in the future can become a self-fulfilling prophecy. That said, expectations are still higher than the 2.3%–3.0% range seen in the two years prior to the pandemic.

In other data earlier Friday, China's official March manufacturing PMI was slightly better than analysts had expected and still in expansionary territory, though down slightly from February. There was also positive news from Europe, where overall consumer price inflation dipped to 6.9% in March, the lowest in over a year. Declining energy prices helped, but inflation remains well above the European Central Bank's (ECB) 2% goal. Michelle Gibley, a director of international research at the Schwab Center for Financial Research, notes that economic growth in Europe and China are looking strong, which could end up meaning too much of a good thing for the global economy.

"While markets are pricing in the assumption that most major central banks are either at or near the end of their hiking cycles, central banks could be forced to hike rates again if inflation and economic growth fall less than anticipated," she says. "How the global economy and inflation continue to evolve in a post-pandemic time is uncharted territory. Market volatility could remain elevated."

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