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Low Inflation Data Reduces Rate Hike Possibility: 5 Picks

Nalak Das

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.

SS&C Technologies Holdings Inc. SSNC provides software products and software-enabled services to financial services and healthcare industries in the United States, Canada, Mexico, Europe, the Asia Pacific and Japan. The company has an expected earnings growth rate of 30.5% for the current year. The Zacks Consensus Estimate for the current year has improved 7.3% over the last 60 days.

Insperity Inc. NSP provides human resources and business solutions to enhance business performance for small and medium-sized businesses in the United States. The company has an expected earnings growth rate of 22.4% for the current year. The Zacks Consensus Estimate for the current year has improved 6.5% over the last 60 days.

MGP Ingredients Inc. MGPI produces and supplies distilled spirits, and specialty wheat proteins and starch food ingredients. The company has an expected earnings growth rate of 20.3% for the current year. The Zacks Consensus Estimate for the current year has improved 6.5% over the last 60 days.

Medifast Inc. MED manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products. The company has an expected earnings growth rate of 41.1% for the current year. The Zacks Consensus Estimate for the current year has improved 11.5% over the last 60 days.

Lululemon Athletica Inc. LULU designs and retails athletic clothing for women, men and female youth. The company has expected earnings growth of 20.3% for the current year. The Zacks Consensus Estimate for the current year has improved 5% over the last 60 days.

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SS&C Technologies Holdings, Inc. (SSNC) : Free Stock Analysis Report
 
MGP Ingredients, Inc. (MGPI) : Free Stock Analysis Report
 
MEDIFAST INC (MED) : Free Stock Analysis Report
 
lululemon athletica inc. (LULU) : Free Stock Analysis Report
 
Insperity, Inc. (NSP) : Free Stock Analysis Report
 
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