Growth or Inflation? | March 12, 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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Growth or inflation, which will command the interest of investors? Did you see what I did there???

Monday

The movement for the day was generally in the green. This came off weekend news that the senate passed the $1.9T stimulus package. It is now headed back to congress to ratify the modifications. Late it the day interest rates surged (for the same reason) as concerns around inflation increased. This surge caused the rally to fade, and markets ended the day in the red.

Tuesday

Markets surged strong on Tuesday. Led by the NASDAQ, sending a sign that there may have been too much made of the recent inflation trade. The S&P 500 rose 1.84%, while the NASDAQ posted its strongest single day gains since November.

Wednesday

Oil inventories rose more than expected and Consumer Prices rose less than expected. Markets climbed early on the better than expected inflation data. They held onto those gains through the close.

Thursday

Markets rose on Thursday with the S&P 500 rising 1.05%. The NASDAQ, however led the way at 2.51%. Jobless claims fell to the lowest level since December. Additionally, Job openings were higher and showed promise.

Friday

The interest rate environment was back in focus as rates climbed Friday morning. With that markets started the day deep in the red. They spent the day digging out of the whole and finished in the green. A good sign, as investors felt comfortable being long the market heading into the weekend.

Conclusion

This last week was a strong week for markets, with the S&P 500 rising 2.64% on the week. While caution still exists around interest rates, markets seemed to have realized that the rising rates as a result of rapid growth expectations was actually a good thing. The anticipated inflation risks are expected to be transitory, fading by early 2022.