Strong data is 'good news' for markets, but may delay Fed cuts

Stocks (^GSPC, ^IXIC, ^DJI) are trading higher after consumer sentiment and pending home sales data came in better-than-expected. BlackRock Senior Macro Investment Strategist for iShares EMEA Laura Cooper joins Yahoo Finance Live to discuss what this means for markets.

Cooper calls the data "good news," saying it shows continued strength in the economy. She highlights that the commentary out of the Federal Reserve has pointed to the fact that officials are "willing to live with a higher degree of inflation," but that hasn't deterred them from a possible easing cycle— though strong data could prompt a delay.

Cooper suggests that if no interest rate cut materializes in June, there could be "a knee-jerk reaction" in markets that slows down equities' momentum. Cooper also emphasizes that the market is being driven by "relatively strong fundamentals," which still bodes well for the equity market.

Regarding inflation, Cooper notes that the data so far shows it is hotter-than-expected. However, in light of the PCE print set to be released on Friday — expected to be cooler than anticipated— she states that there needs to be a slew of prints that indicate slowing inflation for the Fed to be "comfortable" enough to cut rates.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

- We have Laura Cooper-- BlackRock Senior Macro Investment Strategist for iShares EMEA. Thank you so much for being here, Laura. Is this good news both for the markets and the Fed this morning?

LAURA COOPER: I think it is probably good news, because it essentially just continues this string of strong economic data that we have seen. And certainly markets are reacting in kind to that because I think when we look back to what we heard from the FOMC last week, it does suggest that the Fed is willing to live with a higher degree of inflation and yet still follow through on an easing cycle, starting probably in the middle of this year.

Now, we did, of course, have some comments from Waller that suggested so long as this data does continue to surprise to the upside, perhaps they're going to delay that a little bit. But I think this is not a material enough change. I would think the inflation print tomorrow is probably going to be more of a signal that leans still towards the Fed, still potentially cutting, if not June, then certainly I would suspect by July.

- Laura, if we don't get a rate cut in June, what do you think that immediate reaction could potentially be for equities?

LAURA COOPER: Well, we have seen a little bit of paring back of the odds of that June cut. So we were about 80% before the Waller speech and then that kind of subsequently fell to about that 60% mark. So there is scope for that to be further priced out. So a bit of a knee jerk reaction at the front end of the curve would potentially take out some of the steam from the US equity market.

But I think overall, this is still a market that is being driven by relatively strong fundamentals. Central banks are poised to cut rates. Economic activity in the US continues to remain strong. And then overlay that with what's happening in earnings. We look at earnings expectations across sectors in the US.

They are all expected to post positive 12-month estimates. So I think it's quite still a favorable backdrop for equities really in the absence of a clear catalyst. Potentially tomorrow's inflation print could be kind of a knee jerk reaction if it does surprise strongly to the upside. But I think we would need to see a few of those upside inflation surprises come through for the Fed to materially deviate from its current policy stance.

- Well, on that data we're getting tomorrow, Laura, what does the data we've gotten in so far, particularly with CPI and PPI tell us about what we might be able to expect tomorrow?

LAURA COOPER: Well, I think the data so far does suggest that inflation is coming in a bit hotter certainly than the Fed would be comfortable with. But we did have Powell last week suggest that they do expect the inflation print for the PCE come in below that 30 basis point mark tomorrow. The market's expecting the core gauge to come in about 0.3%.

So below that kind of 0.4% print that we saw yesterday. But we need to see sequential month on month prints show further signs of slowing for the Fed to be comfortable that it's going to have inflation back on that sustainable path to 2%. So it does suggest that even if the Fed does start cutting in July, if it does get more comfort on the inflation front, this is going to be a very gradual easing cycle.

And I think financial conditions are still easy. The battle for the Fed will really be trying to maintain this kind of hawkish guidance try to keep rates restrictive so long as this economic backdrop continues to remain as resilient as it has been.