After a voaltile and negative week last week, equity markets were calmer and slightly higher. Recent Fed speak and better-than-expected economic data have caused a quick tempering of bets for Fed cuts this year. At the beginning of the year, there was a widespread expectation that the Federal Reserve's series of interest rate increases over the previous two years would not only reduce inflation but also cause financial stress in the economy, leading the market to bet on as many as 6 cuts in 2024. Now, swaps markets imply about 60 basis points of easing this year, implying about 2 cuts starting by September. The recent repositioning is causing yields to drift higher as the 10YR Treasury hit a year-to-date high at 4.4%.

Looking ahead, we will get an all-important inflation report, the Consumer Price Index, on Wednesday. Expectations are for the gauge to print a 3.4% YoY number, up slightly from the previous month's 3.2% read. Looking at the core gauge, which excludes the more volatile food and energy, expectations call for a 3.7% YoY print which is well above the Fed's 2% target.

Broad indices are still in medium-term uptrends, however, recent breadth indicators are showing short-term weakness. We are entering Q1 earnings season where, according to Factset, the estimated Q1 2024 YoY earnings growth rate for the S&P 500 is 3.2%. This estimate would mark the 3rd straight quarter of year-over-year earnings growth for the index. On the other hand, companies are issuing negative Earnings Per Share (EPS) guidance at the second-highest rate since Q2 2019. We are still in the early innings of earnings season as only 9 companies from the S&P 500 report this week.

There has been an elevated level of short-term rotation in the market, exemplified by the rate of change in Newton scores on the broad-based indices. This week, we can see that the worst area, Emerging Markets is on top while the best area last week, Large Caps, has now lost strength. The theme of value names remaining strong relatively, however, is continuing this to start the week. Materials and Energy are the strongest sectors for a second straight week. Consumer Cyclical and Technology are the laggards once again.