Major U.S. equity Indexes traded slightly lower last week as investors interpreted hotter-than-expected wholesale and consumer pricing inflation data for January. Last week’s headlines have created questions, so here’s a quick update to keep you up to speed on the inflation data, along with the market reaction to it.
For the week ending February 16, the S&P 500 declined by 0.42%, the Nasdaq 100 was lower by 1.54%, and the Dow Jones Industrial Average was marginally lower by 0.11%.
January Consumer Inflation Data Runs Hot
First, on the consumer side, inflation was sticky and stubborn starting the new year. Consumer Price Index (CPI) data came in hotter than expected last Tuesday, showing a 0.3% monthly increase in January and a 3.1% increase versus one year ago. Estimates were for gains of 0.1% for the month and a 2.9% gain year-over-year.
Pragmatically, it only makes sense. We, as consumers, can see that prices remain stubbornly high across a wide range of goods and services. Plus, as previously mentioned, inflation will most likely not recede linearly, with fits and starts along the way. It will take time for inflation to come down to the Federal Reserve’s 2% target.
Shelter prices (once again) were a key driver for higher prices, with prices showing a 0.6% increase for the month. Food prices (both “at home” and “away from home”) were higher in January, by 0.4% and 0.5% month-over-month respectively, according to the data from the U.S. Bureau of Labor Statistics.
CPI Market Reaction
The market reaction was indeed sour (yet orderly) on the day of the data release, with the Dow shedding over 500 points and the S&P 500 giving back 68.67 points. But, as disciplined investors, we don’t make emotional judgments based on one day of trading or one data release.
After the initial downside reaction to the data release, the S&P 500 shook it off over the two subsequent trading sessions, clawing back the decline, trading higher for the next two days, and eagerly awaiting the wholesale inflation data to be released last Friday.
Thursday’s softer-than-expected retail sales data also helped the market to find its footing, with the S&P 500 closing at a record high heading into Friday’s Producer Price Index (PPI) data release. More on retail sales in a minute.
Wholesale Pricing (PPI) Hot Too
After the hot CPI print on Tuesday and markets having two days to digest it, Friday gave us a PPI data release that was also higher than expected, creating a double whammy on the inflation front.
The report showed wholesale prices rising by 0.3% in January month-over-month, in contrast to the Dow Jones economist estimate of a gain of 0.1%.
The biggest surprise was Core PPI, which excludes volatile food and energy, which rose by 0.5% versus the estimate for a 0.1% increase. Yikes.
The PPI data release was followed by major stock indexes trading to the downside somewhat moderately on Friday. The major stock market averages closed slightly lower for the week, and the S&P 500 had its first weekly decline in the last six weeks.
Retail Sales Miss
In “bad news was good news” fashion (at least last week), January retail sales posted a higher-than-expected decline, showing a decline of 0.8% versus expectations for a decline of 0.3% by economists surveyed by Dow Jones.
Why is this good news? The market is still so focused on the Federal Reserve (Fed) and interest rates. The weaker consumer would indicate that the economy is slowing, as the Fed has intended by hiking rates in the past.
The retail sales data was sandwiched between the CPI data released on Tuesday and the PPI data released on Friday, perhaps helping to counter the market reaction to the higher inflation prints we saw last week.
Furthermore, suppose for a moment that the consumer was also running hot in last week’s data. That would have indicated that the economy hasn’t cooled and would have increased the odds of rates staying higher for longer. That is the market logic, anyway.
However, a softening consumer is not a good thing overall. Many expected the consumer to weaken quite some time ago, with persistent inflation taking its toll. Last month’s retail sales data could be a signal that consumer resilience is finally softening.
Rate Cuts Probabilities Fall
Traders and investors have dialed back rate-cut bets and expectations in recent days.
Remember the market’s expectations for lower rates to come to the tune of 6 rate cuts in 2024? Well, how fast things can change, with the odds of the Fed leaving rates unchanged through the June meeting now 34.9%, according to Barrons via the CME FedWatch Tool.
Furthermore, remember the market’s March rate cut expectations? That is almost completely off the table, with probabilities showing a 10% chance of such an occurrence as of last Friday’s market close, down from 53.8% one month ago.
It seems the market was indeed ahead of itself in its Fed expectations closing out last year. However, anything can happen. Cue the crystal ball.
The Takeaway
It was perhaps a dose of sobering reality last week: that inflation is still with us. It cannot be all too surprising, as logic dictates inflation’s persistence in our lives. We see it every day.
But the collective market wanted rate cuts. The possibility of such cuts has diminished, as reality has caught up with the market in the form of sticky inflation.
For now, the broader U.S. stock market indexes haven’t seemed to mind, especially the large-cap S&P 500 settling last week above 5000. Tech and AI have led the narrow rally. Is the rally too concentrated and euphoric? The dips have been short-lived so far, and the S&P 500 has proven to be quite resilient.
The Week Ahead
We will see what things week brings us. Things will continue to play out this week, as markets further digest the hot inflation data on this President’s Day holiday-shortened trading week.
Economic data releases are quieter this week after last week’s barrage. However, we do get Federal Reserve meeting minutes on Wednesday and some Product Manufacturing Index data (manufacturing and services) on Thursday.
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