Driving Gains | April 23, 2021 | FFS

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Markets were flat for the week. Capital Gains were driving trade late in the week, what does it mean going forward?

Monday

With a light day in the way of economic data, the inflation focal point did not fade. Markets were lower, led by the NASDAQ and long dated interest rates moved north.

Tuesday

In another day of light data, the markets closed lower. The NASDAQ again led the way lower. In a contrary step interest rates were actually lower on the day. The move became less about interest rates and perhaps some earnings misses.

Wednesday

In a course reversal markets rose broadly on Wednesday. Again, NASDAQ led the way, rising 1.19%. Rates were little changed on the day as focus remained on the current earnings season.

Thursday

Markets were little changed for most of the day. However, it was announced that capital gains would be a target for future reform. This would put a dent into markets as there would be less incentive to invest.

Friday

Markets rebounded Friday as Thursday viewed as an over-reaction to the proposal. This is good news, signaling a desire by investors to be long the market heading into the weekend news cycle.

Conclusion

Markets were moved by a capital gains proposal last week. This announcement is likely to be a starting point of negotiations. Current market conditions should not be impacted by this information. Expect earnings season to dominate markets for the coming week.