The stock market struggled to gain much traction after data pointed to an economy that is slowing amid stubborn inflation, posing a challenge to the outlook of Federal Reserve rate cuts.

Equities wavered and bond yields rose following a report that showed U.S. consumer sentiment declined to a six-month low as short-term inflation expectations picked up. While a slowdown in key sectors has encouraged bets on Fed easing, a chorus of officials continued to echo the higher-for-longer mantra as they try to bring inflation back to the 2 per cent target.

 “The Fed is walking a tightrope as they balance both mandates of price stability and growth,” said Jeff Roach at LPL Financial. “Although it’s not our base case, we do see rising risks of ‘stagflation’ — a concern markets will have to deal with.”

The S&P 500 hovered near 5,220, while notching its third straight week of gains — the longest winning run since February. The Dow Jones Industrial Average rose for an eighth straight session.

Treasury 10-year yields advanced five basis points to 4.50 per cent. Fed swaps showed traders have fully priced in a rate cut by November, and a second reduction by the January meeting.

Although inflation data has overshadowed most other reports this year, it’s important to remember that consumer spending is the main pillar that has been holding up the economy, according to Chris Zaccarelli at Independent Advisor Alliance.

“Today’s lower-than-expected consumer sentiment numbers are a warning sign that the consumer shouldn’t be taken for granted,” he noted. “In addition, inflation expectations have been rising as well — which is a double whammy for the Fed.”

Zaccarelli also noted that if spending slows down and inflation increases, “we’ll get the opposite of the Goldilocks scenario that many were hoping for, and the Fed will be in an especially difficult position of choosing between accommodating a slowing economy and fighting increasing inflation expectations.”

Fed Bank of Dallas President Lorie Logan noted it’s still too early to think about lowering borrowing costs, while Governor Michelle Bowman said she doesn’t expect it will be appropriate for the Fed to cut interest rates in 2024, pointing to persistent inflation in the first several months of the year.

Meantime, Fed Bank of Chicago President Austan Goolsbee said he doesn’t think inflation is stuck above the central bank’s target despite recent data showing price pressures picked up at the start of the year.

Chair Jerome Powell, speaking after the central bank’s April 30-May 1 meeting, said policymakers would likely keep rates high for some time, adding he wasn’t sure how long it would take for him and his colleagues to gain the confidence to lower rates. At the time, he also said he didn’t see “stagflation” regarding growth or inflation.

A litany of weaker-than-estimated data points — from jobs to services and manufacturing — sent the U.S. version of Citigroup’s Economic Surprise Index to the lowest since January 2023. The gauge measures the difference between actual releases and analyst expectations.

“Economic growth slowed sharply in the first quarter and will likely be slow in the rest of 2024, too,” said Bill Adams at Comerica Bank. “Financial markets still expect the Fed to start cutting rates by year-end, with two quarter-percentage-point cuts more likely than one.”

Among the several aspects of Friday’s consumer sentiment report, Peter Boockvar also cited the fact that the higher-for-longer interest rate situation has led to a plunge in buying conditions for big ticket items as stated.

“I said a few years ago when the Fed was aggressively raising interest rates that I was more worried about a death by a thousand cuts economic response, rather than a big immediate economic event/decline, and I’m sticking to that,” said the author of The Boock Report. “This sure feels much more like a 1.5 per cent type economy rather than the 3 per centish that some think we’re still in.”

To Don Rissmiller at Strategas, some central banks like the Fed have taken a more hawkish tone as both growth and inflation data have been choppy.

“Any confirmation of a wobble in the U.S. labor market will likely tip the scale to rate cuts in short order,” he noted. “We would expect to hear more talk of the Fed’s dual mandate to justify such a pivot.”

Looking ahead, traders will be focused on Powell’s remarks during an event on Tuesday and a deluge of economic reports — with the highlight being the consumer price index on Wednesday.

“We see the balance of risks around the CPI print tilted slightly bullish rates,” said Bank of America Corp. strategists including Mark Cabana.

Real rates look attractive as carry remains positive through October, but choppy markets may keep investors on the sidelines, according to Gennadiy Goldberg and Oscar Munoz at TD Securities.

“We expect gradually moderating growth and inflation data to continue pushing rates lower in late-2024 as we look for the Fed to start easing in September,” they noted.

Corporate Highlights:

• McDonald’s Corp. is looking to launch a US$5 meal deal in the U.S. that the burger chain is betting can lure penny-pinching consumers back in.
• Target Corp. won’t sell LGBTQ-themed merchandise in some stores during Pride Month in June, after a backlash dented revenue last year.
• Novavax Inc. signed a $1.2 billion licensing agreement with Sanofi that includes commercializing a combined Covid-19 and flu shot.
• U.S. regulators’ decision on whether to approve Moderna Inc.’s vaccine for RSV has been delayed due to “administrative constraints” at the Food and Drug Administration, as the company works to get its second product to market.
• 3M Co. was raised to buy at HSBC, which noted the company’s earnings showed nascent signs of an “inflection in growth and margin gains from restructuring” at the manufacturing giant.
• Taiwan Semiconductor Manufacturing Co. saw April sales jump 60 per cent as sustained artificial-intelligence demand was helped by the beginnings of a recovery in consumer electronics.
• Sweetgreen Inc.’s shares surged after the salad chain increased its annual sales projection and showed improved profitability as it seeks to expand its footprint.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.3 per cent
• The Dow Jones Industrial Average rose 0.3 per cent
• The MSCI World index rose 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0772
• The British pound was little changed at $1.2527
• The Japanese yen fell 0.2 per cent to 155.78 per dollar

Cryptocurrencies

• Bitcoin fell 3.3 per cent to $60,598.01
• Ether fell 4.1 per cent to $2,898.26

Bonds

• The yield on 10-year Treasuries advanced five basis points to 4.50 per cent
• Germany’s 10-year yield advanced two basis points to 2.52 per cent
• Britain’s 10-year yield advanced two basis points to 4.17 per cent

Commodities

• West Texas Intermediate crude fell 1.2 per cent to $78.33 a barrel
• Spot gold rose 0.7 per cent to $2,363.83 an ounce