Last Week’s Inflation Surprises and ‘Higher for Longer’ Resonate

Markets tried to extend their winning streak last week, but ran out of gas. The S&P 500 crossed the 5,000 level for the first-time last Thursday but struggled to extend its gains. The recent rally remains narrow, led by the Magnificent Seven and AI-related companies. The Russell 2000 was the relative outperformer for the week rising 1.17% compared to the S&P 500 and NASDAQ Composite declining -0.35% and -1.31% respectively.

Monday was a light day for corporate and macroeconomic updates, and markets continued to trend higher on solid earnings results and cooling inflation. But equity markets came under pressure on Tuesday, though they ended the day off their worst levels. Sentiment was already negative heading into the session after disappointing results from several large technology stocks. Futures fell sharply after a hotter-than-expected January CPI was reported in the morning. Headline CPI increased 0.3% m/m and 3.1% y/y and core CPI rose 0.4% m/m and 3.9% y/y.¹ Shelter prices were the biggest driver, increasing +0.6%, and food prices remained sticky, rising +0.4%.¹ Big tech pared losses to end the session while small caps led the downside with the Russell 2000 lower by nearly 4%.

Markets rebounded strongly on Wednesday led by the Russell 2000 (+2.4%) and NASDAQ (+1.3%). While big tech continues to lead the markets higher, market breadth has improved relative to last year. Oil stocks saw selling as WTI crude declined by nearly 1.5% after a large weekly US inventory build.² Optimism continues to rise in the markets, with the latest AAII investor sentiment survey showing “Bullish” responses fell markedly from 49% to 42.2%, but remain well above the historical average.³

Markets continued their rebound to end higher on Thursday as investors digested several economic releases. Jobless claims were lighter than expected at 212K, still suggesting a strong US labor market.⁴ January retail sales surprised on the downside and declined 0.80% in January, missing estimates of -0.2%.⁵ The weakness was likely driven by seasonal adjustments and a harsh winter.⁵ Most categories across the board were weaker, with building materials and auto-related spending leading the declines.⁵ Despite the disappointing report, we believe consumer spending remains resilient, backed by rising wages and a strong labor market.

Equity markets declined modestly on Friday to end near its worst levels of the day following a hotter-than-expected PPI report. Headline PPI increased 0.3% m/m (vs 0.1% consensus) and core PPI rose 0.5% m/m (vs 0.1% consensus).⁶ Services prices drove the increase, with outpatient care rising 2.2%.⁶ While the inflation reports were disappointing, the broader disinflation narrative remains intact – but odds of a Fed rate cut continue to shift later into the year.

Sources

1. https://www.cnbc.com/2024/02/13/cpi-inflation-january-2024-consumer-prices-rose-0point3percent-in-january-more-than-expected-as-the-annual-rate-moved-to-3point1percent.html
2. https://ir.eia.gov/wpsr/wpsrsummary.pdf
3. https://www.aaii.com/sentimentsurvey
4. https://www.dol.gov/ui/data.pdf
5. https://www.cnbc.com/2024/02/15/retail-sales-january-2024-.html
6. https://www.cnbc.com/2024/02/16/january-wholesale-prices-rise-0point3percent-more-than-expected.html