The Inside Story | January 28, 2022 | 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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The S&P 500 and volatility were little changed week over week. The inside story, however, was far more interesting!

Monday

What. A. Monday… Markets ended the day higher. The reason for excitement is that at one point, the S&P 500 was down as much as 3%. It ended the day up 0.63%! The 3% fall moved the S&P 500 into correction territory and immediately caught a bid. Its ability to persist will remain to be seen as we get the Federal Reserve Bank (FRB) meeting results later this week.

Tuesday

It was almost déjà vu on Tuesday. Markets slumped early and attempted a comeback. That comeback stalled late in the afternoon with the S&P 500 losing more than 0.5% on the day. Much of the moves were continued speculation over the FRB meeting that will end on Wednesday.

Wednesday

The FRB did not disappoint. They have been very transparent about their intent to raise rates soon, soon is likely March. Additionally, they have stated that they will begin reducing their balance sheet via attrition after rate hikes. There are approximately $300B in under 90 maturities that could begin rolling off their balance sheet as early as this spring. It is still to be determined to what extent they will allow this to occur. Markets LOVED the news and showed the love by losing 0.15% on the S&P 500 for the day. This came after the index was up as much as 2% at times.

Thursday

The S&P 500 slipped 0.54% Thursday in a move that was contrary to data. GDP walloped expectations, growing by 6.9% when 5.5% was expected. Even 5.5% would have been lofty, however 6.9% was well above estimates. The concern is that the continued hot growth (consumption) will continue to lead to higher prices (inflation).

Friday

Markets bounced to end the week as the S&P 500 gained 2.45% on the day and 0.77% for the week. The sentiment from Friday was a clear indication from investors that many of the week’s concerns were likely overblown.

Conclusion

Volatility was way up at mid-week as markets were trying to decide how deep they wanted to take this correction. Late in the week, Bulls took over and buying ensued. Often there is a second wave of selling after the storm appears to have cleared. So, we may not be out of the woods just yet. Look for more clarity after the Friday jobs report this week.