PCE data shows investors should 'favor caution': Strategist

The core PCE data released on Friday revealed a slight uptick in inflation, with a reading of 2.8%. As uncertainty surrounding potential Federal Reserve rate cuts loom, Wells Fargo Investment Institute Global Market Strategist Gary Schlossberg joins The Morning Brief to discuss the implications of this data for markets.

Schlossberg acknowledges that while inflation is coming down, the pace of disinflation has "slowed." In light of the recent inflation data showing a slight uptick, he says "the jury is still out" on what this means for potential rate cuts. However, Schlossberg believes the job market is "holding up quite well," with unemployment ticking down, indicating "good momentum." He suggests that the Fed may not be "in any real rush to cut interest rates."

Schlossberg advises investors to "maintain an element of caution" in current market conditions. He recommends defensive stocks, quality stocks, and large-cap stocks due to "soft spots" in the market and uncertainty surrounding earnings growth.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

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

Video Transcript

BRAD SMITH: Now, inflation is ticking higher last month, though still in line with expectations. The Fed's preferred inflation gauge, that's PCE, it increased 2.8% compared to last year. We got that data point Friday. This is exactly the sort of data that Fed President Jerome Powell wants to see ahead of potentially cutting rates later this year. Now, Powell is tamping down expectations of rushing into a rate cut. He did that last week and let's listen to what he had to say.

JEROME POWELL: The economy is strong. That means that we don't need to be in a hurry to cut. It means we can wait and become more confident that, in fact, inflation is coming down to 2% on a sustainable basis.

JARED BLIKRE: For how investors should be looking at inflation data, we have Gary Schlossberg. He's a Wells Fargo Investment Institute global market strategist. So Gary, just your big picture view here, what should we be expecting?

GARY SCHLOSSBERG: Well, we are seeing inflation coming down, but that so-called disinflation has slowed noticeably. The progress against inflation at a rate still above the Fed's target level has slowed. And in fact, over the past couple of months, both the CPI and the Fed's preferred PCE deflator measure of inflation actually have ticked up a bit. So the jury is still out on just what sort of trajectory we will be seeing on inflation and how the Fed will respond to that, I think.

BRAD SMITH: Part of that is the employment situation and the readings that we're going to get on jobs over the course of this week as well, Gary. What most notably would you be watching for in terms of a trend that the Fed is really looking to play out here as they're continuing to implement strategy and policy right now?

GARY SCHLOSSBERG: Well, the numbers have become a little more mixed lately, as you pointed out. Things like the quit rate, layoffs have begun to decline and increase respectively. My take on the job market, though, is that it's still holding up quite well. We could see the unemployment rate ticked down to 3.8%.

We're still looking for another healthy gain in the job market. So we still have some good momentum. And as Chairman Powell has pointed out, with these kind of numbers and backstopping the economy, which is holding up well, the Fed shouldn't be in any real rush to cut interest rates and certainly not cut them aggressively.

BRAD SMITH: Gary, I want to talk about the market. And we are just coming off of five solid months of gains. And as you note in your notes to us, pretty unusual to see a winning streak like this. But as I'm fond of saying, strength tends to beget strength. And that's especially true in the stock market, what are some of the particulars of what we might expect historically when we have these five months of strength like we do?

GARY SCHLOSSBERG: Well, we certainly see the economy riding a good bit of momentum. Growth is holding up. The market is optimistic on Fed rate cuts. That opens up opportunities for further upticks in valuation. In this kind of environment, though, we favor caution out there, defensive stocks, quality stocks, liquid stocks, which mean large cap.

Focusing on the US, developed markets to some extent. But we maintain an element of caution out there going into the second quarter of the year and into the latter part of the year. We think there are some soft spots in the economy, which will reduce its momentum and temper that earnings growth that we've seen holding up so well.

BRAD SMITH: Will soft spots that you're also tracking internationally also have a broader influence on some of the economic readings that we're starting to get here in the US as well?

GARY SCHLOSSBERG: Well, we're expecting to see inflation continuing to come down. But the growth in world trade has been quite gradual at the moment. There are encouraging signs in the last couple of days out of China. But all in all, the world trade environment has been difficult. Europe is constrained more than the US by fiscal stimulus.

So we do look for the European economies in particular and the developed economies in more general to lag the US in this economic growth over the next several months. And as I said, we see some headwinds developing-- Not very strong ones-- but developing in the financial area credit quality, delinquency rates moving up, saving rates historically low that can slow the economy's momentum here and to some extent overseas.

BRAD SMITH: Gary Schlossberg, Wells Fargo Investment Institute global market strategist. Gary, thanks so much for taking the time here with us today to--

GARY SCHLOSSBERG: Thank you. Thanks for having me.

BRAD SMITH: --kick off the second quarter. Definitely.