S&P 500: 1.84% DOW: 0.34% NASDAQ: 3.09% 10-YR Yield: 3.95%
Last Week on WallStreet - January 13th, 2024
After the S&P 500's extended weekly winning streak was interrupted, equity markets suggested that this might have been a temporary lull as they picked up their upward momentum last week, as buyers returned in force. The shift in the Federal Reserve's approach, from a cycle of interest rate hikes to a pause and now an anticipated easing, has traders focused on forecasting the timing and number of potential rate reductions. This speculation is expected to be a key factor in market volatility, as the trajectory of interest rates and their economic impact are factored into corporate earnings and stock valuations. Last week, despite the December CPI report indicating higher-than-anticipated inflation, investors appeared to disregard this, recognizing that although the general direction of inflation is promising, the road ahead might be uneven. With the Fed starting to consider easing some of its restrictions, it will be closely monitoring these developments to prevent significant stagnation in inflation at current levels, or, even more critically, a possible reacceleration.
Beneath the surface, Technology (+4.4%) took center stage, reversing its significant loses from the week prior. Communications (+2.4%) and Staples (+1.1%) also performed well in this week's resurgence. Energy (-2.4%) continued its struggles of the last few months followed by Utilities (-1.9%).
Consumer Prices Rose 0.3% in December, Higher Than Expected, Pushing the Annual Rate to 3.4%
- The consumer price index increased 0.3% in December and 3.4% from a year ago, compared with respective estimates of 0.2% and 3.2%
- Core CPI also rose 0.3% for the month and 3.9% from a year ago, compared with respective estimates of 0.3% and 3.8%
- Wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago
The key takeaway - In 2023, the headline inflation rate of 3.4% was a welcome figure, considering the fears of a potential inflation nightmare in previous years. This improvement prompted the Federal Reserve to pause its policy tightening and even signal upcoming rate cuts. However, December's data brought some uncertainty, as inflation rose unexpectedly, suggesting that the downward trend might be slowing. This raises concerns about the likelihood of achieving the Fed's 2% target smoothly. Moreover, there's a noticeable gap between market predictions, which anticipate quicker and more frequent rate cuts, and the Fed's more conservative projections. How this disparity resolves - whether through market adjustments to align with the Fed or significant shifts in the Fed's expectations - will significantly impact the trajectory of returns in the upcoming months.
US Producer Prices Unexpectedly Fall; Goods Deflation Seen Persisting
- The producer price index for final demand dipped 0.1% last month, rise 1% on a year-over-year basis
- Economists polled by Reuters had forecast the PPI rebounding 0.1%
- Core PPI rose 0.2% in December and 2.5% YoY
- Goods prices dropped 0.4%, with a 12.4% decline in the cost of diesel fuel accounting for half of the decrease
The key takeaway - The Producer Price Index (PPI) offers a different lens to view current inflation trends by examining the costs of producing goods and services. Since its peak in early 2022, PPI has shown a much stronger downward trend compared to consumer price data. Stabilization in global supply chains and declining energy prices in recent months have contributed to bringing core producer prices closer to the Federal Reserve's target. While PPI trends don't directly instigate changes in consumer prices, they suggest a potential broad decline in inflation as production costs slow. However, energy markets remain an upside risk factor, as geopolitical conflicts in the Middle East could lead to higher fuel prices, increasing production and goods costs.
US Consumer Credit Tops $5 Trillion for First Time in November
- Total consumer credit rose $23.7 billion in November, up from a $5.8 billion increase in the prior month, the Federal Reserve said
- This translates to a 5.7% annual growth rate and brings total consumer credit up to a 5.7% annual growth rate
- Revolving credit, like credit cards, rose sharply at a 17.7% rate after a 2.7% gain in the prior month
The key takeaway - Investors and economists are closely watching the American consumer's behavior for clues about the economy's direction in 2024. Post-pandemic, consumers' eagerness to spend despite high interest rates and other challenges has fueled economic growth. This surge in spending is partly due to increased credit utilization, leading to higher debt levels on American balance sheets. While this boosts spending in the short term, it could signal future difficulties. With interest rates now significantly higher, credit is not as affordable as before, making it more expensive to service these debts. This could reduce the disposable income available for consumer spending. The shopping season played a role in the recent increase in credit usage, but the ongoing trend of rising credit balances may put a strain on consumer demand moving forward.
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