S&P 500: -0.28% DOW: -0.13% NASDAQ: 0.59% 10-YR: 3.83%
Last Week on WallStreet - February 18, 2023
A choppy week on Wall Street ended with a mixed performance from equities. A fresh set of inflation figures, commentary from Fed representatives, and economic data led to a rally in interest rates, dampening asset prices. Investors continue to debate the probability of continued Fed hawkishness and how well the economy can weather the storm brought on by the resulting monetary tightness. For the second straight week, the more pessimistic crowd has won out.
Beneath the surface, sector performance was equally as varied with 5 finishing higher and 6 entering the weekend with losses. Energy (-6.3%) was the only sector making a decisive move as oil prices declined. Discretionary (1.6%) and Utilities (1.1%) both gained ground.
Annual Inflation Cooled Slightly in January as Pace of Moderation Levels Off
- The Consumer Price Index climbed by 6.4 percent in January compared with a year earlier, faster than economists had forecast and only a slight slowdown from 6.5 percent in December
- For the month of January, CPI rose 0.5% month-over-month compared to a 0.1% increase in December
- Core inflation, which removes food and gas prices, rose 0.4% in the month and 5.6% from last year
The key takeaway - Significant headway has been made since the sky-high CPI prints of last summer, but disinflation seen since seems to be moderating. Remember, the Federal Reserve's long-term target is 2% and while 6.4% is preferable to 9%, substantial headway is needed to return to a destination where the Fed feels comfortable. Service sector price growth is of particular concern as the strong labor market forces wage gains, increasing costs for businesses and the prices they charge. Ultimately, the report gives the Fed additional reason to maintain hawkishness to ensure inflation doesn't get away from them.
US Consumer Sentiment Improves; Inflation Expectations Rise
- Advance retail sales for the month increased 3%, compared with expectations for a rise of 1.9%, the Commerce Department reported Wednesday
- On a year-over-year basis, retail sales increased 6.4%
- No categories saw a decline, following a December in which total sales fell 1.1%
- Food services and drinking places surged 7.2% to lead all major categories
The key takeaway - Retail sales strength returned in January following two consecutive months of declines, illustrating consumers are still willing to get out and spend. This is especially evidenced by the leap in food and drink service sales which act as an indicator of the American consumer's discretionary spending habits and typically provide hints on the economy's trajectory. If this strength continues, it could spell higher inflation readings as well.
US Single-Family Housing Starts, Building Permits Tumble in January
- Single-family housing starts, which account for the bulk of homebuilding, dropped 4.3% to a seasonally adjusted annual rate of 841,000 units last month
- Single-family homebuilding tumbled 27.3% on a year-on-year basis in January
- With both single- and multi-family homebuilding declining, overall housing starts dropped 4.5% to a rate of 1.309 million units last month, the lowest level since June 2020
- The inventory of single-family housing under construction fell 1.1%
The key takeaway - As any buyer or seller would know, the housing market has been in a steep recession since mid-2022 as the Fed's monetary tightening drove borrowing costs steeply higher. Despite this report providing another month of declines, mortgage rates have fallen sharply from their peak in November and signal that the worst of the housing market's pain may be over. If borrowing rates continue to stabilize and potentially improve, we could see a gradual recovery in the market.
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