Last Week on Wall Street

Last Week on WallStreet - February 17th, 2024

S&P 500: -0.42% DOW: -0.11% NASDAQ: -1.34% 10-YR Yield: 4.29%

What Happened?

All three major equity indexes snapped their 5-week winning streaks as hotter-than-expected inflation data poured in from different levels of the economy. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) reports for January surprised to the upside, suggesting that the consistent decline in inflation witnessed last year might plateau as we enter the final phase of the battle against inflation. This data compelled the markets to reassess their anticipated timeline for the Federal Reserve to implement rate cuts this year, with reduced likelihood of a rate cut until the middle of 2024. Consequently, bond yields increased throughout the week, applying pricing pressure on stocks and bonds, driving them lower. For the Federal Reserve, this report introduces complexity to their decision-making process as they try to strike a balance between curbing inflation and avoiding economic destabilization.

Beneath the surface, despite mixed performance at the sector level, the indexes recorded widespread losses. Notably, recent underperformers, Energy (+2.7%) and Materials (+2.4%), posted solid results last week. However, the Technology (-2.5%) sector, representing the largest weight in the S&P 500, hindered the overall index.


Hotter-Than-Expected Inflation Clouds Rate-Cut Outlook

  • The Consumer Price Index rose 0.3% in January, a 3.1% rise year-over-year
  • Core prices, excluding food and energy costs, were up 0.4% in January and 3.9% from a year ago
  • All of these readings exceeded economist expectations
  • Shelter costs were a primary contributor rising 0.6%

The key takeaway - The January CPI report disappointed investors anticipating the Federal Reserve to embark on a swift and aggressive rate-cutting cycle, authorized by easing inflationary pressures and a relatively resilient economy. However, the outlook for rate cuts this year has become more uncertain following this report. As we have noted before, the steady decline in inflation observed over the past year and a half will likely a more stubborn and uneven descent toward the Fed's 2% target, if we reach it at all. This report has relieved some of the pressure on the Fed to quickly implement rate cuts, pushing expectations for their first action further into the middle of the year. As repeated by the Federal Reserve, their decisions are data-dependent, and the current data affords them some breathing room to carefully assess the optimal timing for their future actions.


Jeffry Bartash - MarketWatch

Retail Sales Tumbled 0.8% in January, Much More Than Expected

  • Advance retail sales declined 0.8% for January, down from a 0.4% gain in December
    • Greater than the estimated 0.3% drop
  • On a year-over-year basis, retail sales were up just 0.6%
  • The control group of retail sales, which excludes items such as food service, autos, gas and building materials, fell 0.4%

The key takeaway - The decline in retail sales during January can be attributed to a variety of factors, including adverse weather conditions, a post-holiday season slump, and while one unfavorable report does not establish a trend, there's a chance the consumer may be showing signs of softness. The robustness of consumer spending has been a key driver of the economy, propelling it to above-trend growth in 2023, a year many expected to see a recession in. Sustaining the expansion relies on Americans' ability and willingness to spend. Despite expectations of economic softening in the upcoming year, as long as we don't observe a consistent trend of reduced consumer spending or detect cracks in the labor market, it is likely that we will maintain this modest pace. The impact of the higher interest rate environment on these drivers remains uncertain, and only time will tell whether and when the weight of borrowing cost might drag on them.


Wholesale Prices Post Biggest Increase in Five Months, PPI Shows

  • The producer-price index rose 0.3% last month, a considerably stronger increase than the 0.1% forecast
    • The fastest pace in five months
  • Core wholesale prices, which exclude food, energy and trade margins, rose by an even sharper 0.6%
  • The rise in wholesale inflation over the past 12 months ticked down to 0.9% from 1%. Core was unchanged at 2.6%

The key takeaway - The Producer-Price Index (PPI) plays a crucial role in identifying current and future inflation trends. When the costs of goods and services rise for producers, these businesses tend to pass on the increased expenses to customers in the future to safeguard their profit margins as much as possible. This ripple effect eventually exerts upward pressure on consumer-level inflation. The upside surprise in wholesale prices further supports the narrative that the struggle against inflation is not over, and we are likely to have a bumpy ride downward. The Federal Reserve will add this to the list of data points influencing their decision to hold on rate cuts until more convincing disinflationary data arrives.


From Around the Watercooler

OpenAI unveiled its text-to-video AI tool named Sora. The tool can generate videos up to a minute long based on a user’s text prompt

Caitlin Clark broke the women’s NCAA scoring record against Michigan, cementing her status as the greatest women’s NCAA baller of all time.

Cisco laid off 5% of employees, around 4,250 people, as technology companies continue to downsize

The total value of the Bitcoin surpassed $1 trillion for the first time since 2021 as the total crypto market broke $2 trillion