Choppy Waters | February 4, 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 gained ground last week. Are markets calming down or should choppy waters be expected?

Monday

The week opened strong as the S&P 500 rallied 1.87% into the close. The fears around rate hikes subsided as the 10-year treasury yield fell slightly. Markets will be focused on Tech this week as they were a few weeks ago on financials.

Tuesday

The S&P 500 gained 0.69%, in what was pretty much a sideways day for markets. Expectations are pretty low for this month’s jobs report due out Friday the 4th. Concerns are mounting that the January report will be pretty disappointing as it will encompass the height of Omicron.

Wednesday

Markets rose on Wednesday aided by a strong earnings report from Alphabet (Google). Additionally, they announced a stock split which was received well by investors. The S&P 500 gained 0.95% on the day.

Thursday

Markets fell sharply on Thursday, surrendering the week’s gains. The S&P 500 ended up shedding 2.43%. Factory orders fell more than expected and while services outperformed expectations, they still fell sharply. A major driver on the day was earnings as Meta missed on earnings per share. This caused their stock to dive, taking communication stocks with it.

Friday

Happy jobs Friday! Markets loved the report. Not only was the data strong, but there were revisions for the last few months (an increase of 750K jobs). So much for Omicron putting a damper on job data. The S&P 500 ended up adding 0.52% on the day.

Conclusion

The S&P 500 gained 1.55% for the week. This was the best week for the S&P 500 so far in 2022. Not shocking, given recent volatility. The coming week’s economic calendar is light; however, the earnings calendar is loaded. Expect recent volatility to continue. Currently, 77% of companies have been beating estimates. Baring disruption, we should expect the markets to welcome the increased earnings data.