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Financial Market Update – Week of 01/16

January 16, 2023

Broad market sentiment improved further last week as attention turned to moderating inflation data. Major U.S. equity indexes liked the data and notched their second consecutive week of gains to start 2023. 

Summarizing last week’s trading, the large-cap S&P 500 added 2.67%, the Nasdaq 100 increased by 4.54%, and the Dow Jones Industrial Average rose by 2.00%.

Inflation Declines

It’s what market watchers wanted to see: declining consumer inflation. Estimates projected a year-over-year rise of 6.5%, and the data showed just that. 

The CPI reading marked the smallest annual increase since October 2021. Core inflation (which removes volatile food and energy from the metric) rose 0.3% month-over-month, matching analyst expectations.

Broader markets posted small gains Wednesday on the data release, and buyers followed through on Thursday and Friday, with both higher days for the S&P 500.

Small-Caps Outperform Last Week

The benchmark U.S. small-cap stock index, the Russell 2000, rose steadily last week. Outperforming other major market indexes for the week, the $RUT tacked on gains of 5.26% overall last week.

2022 was a dismal year for small-caps, with the Russell 2000 Index lagging behind its larger-cap index counterparts.

In addition, the iShares Russell 2000 ETF ($IWM) broke above its 200-day moving average last week, which is interpreted as a bullish indicator by market technicians.

Cryptocurrency Rebounds

Crypto had quite the week too, with large-caps like Bitcoin and Ethereum moving higher and smaller altcoins catching a bid. Heavy short covering and liquidations were noted in last week’s trade.

Market participants welcome the move and change in sentiment after the FTX collapse in November. Solana, a cryptocurrency that declined severely in 2022 both before and after the FTX fiasco, had an especially notable week of gains.

Slower and/or smaller rate hikes from the Federal Reserve could help shift sentiment in the space as more uses for blockchain are in development.

Oil Bounce

February West Texas Intermediate crude oil futures traded north of $79 a barrel last week, courtesy of an improved Chinese demand outlook.

Winter has been mild so far in the U.S., keeping somewhat of a lid on home heating oil prices for many Americans. This is a welcome reprieve after surging inflation. The U.S. average heating oil price was $4.545 per gallon as of January 9th, making a typical residential 275-gallon heating oil tank about $1,250 to fill. Not exactly inexpensive for many folks in the Northeast!

Slight Decline in Treasury Yields 

US 10-year yields retreated marginally last week as investors digested a rather complex picture of declining inflation prints and expectations for future Fed rate hikes. The 10-year note yield settled at 3.51% at the conclusion of last Friday’s trading. 

Busy Week Ahead

U.S. stock markets are closed on Monday, January 16th, in observance of Martin Luther King Jr. Day. From Tuesday to Friday, there are several important economic data releases. At the same time, we have the World Economic Forum (WEF) annual meetings for the duration of the week.

Here are just a few of the economic data highlights for this week (all times EST):

  • Monday – Friday – WEF annual meetings
  • Tuesday 8:30 a.m. Empire State Manufacturing Index
  • Tuesday 3:00 p.m. – Federal Open Market Committee (FOMC) Member John C. Williams speaks
  • Wednesday 8:30 a.m. – PPI, Core PPI
  • Wednesday 8:30 a.m. – Retail Sales, Core Retail Sales
  • Wednesday 2:00 p.m. – FOMC Member Patrick Harker speaks
  • Wednesday 5:00 p.m. – FOMC Member Lorie K. Logan speaks
  • Thursday 8:30 a.m. – Philly Fed Manufacturing Index
  • Thursday 8:30 a.m. – Unemployment Claims
  • Thursday 8:30 a.m. – Housing Starts
  • Thursday 8:30 a.m. – Building Permits
  • Thursday 1:15 p.m. – FOMC Member Lael Brainard speaks
  • Thursday 6:35 p.m. – FOMC Member John C. Williams speaks
  • Friday 9:00 a.m. – FOMC Member Patrick Harker speaks
  • Friday 10:00 a.m. – Existing Home Sales
  • Friday 1:00 p.m. – FOMC Member Christopher J. Waller speaks 

I point out this action-packed schedule on this short week, as this schedule offers much more Fedspeak than usual. Given last week’s decline in CPI, market participants will be seeking Fed guidance on interest rate policy. Any signs of a less aggressive Fed should gather attention from market bulls.

The Takeaway

Rising energy prices last week and risk-on cryptocurrency price improvement tell a preliminary story of sentiment improvement so far in 2023. Strength in outside markets such as these can be constructive for the overall tone of U.S. equity markets.

In fact, we now have two trading weeks in the books for 2023, and the broader equity and consumer sentiment feels like it has improved a bit. A notable improvement in consumer inflation is very constructive and has contributed to quelling downside volatility in the broader equity market indexes. However, risks remain with the global slowdown, inflation, and interest rates. 


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