Will the Clouds Part? | February 18, 2022 - Financial Future Services

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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It was a rough week for markets. Volatility is up, but will it be here to stay or are the clouds soon to part?

Monday

Markets dropped at the opening bell and gained briefly in mid-day trading; however, the S&P 500 never really gained momentum for the day. The index closed down .38% for the day. Importantly, the 10-year treasury closed above 2% for the second time in a week.

Tuesday

The S&P 500 opened in the positive at the news of easing tensions in Russia and Ukraine. PPI Figures came in slightly lower at 9.7% (Jan) compared to 9.8% (Dec) but are still high. As wholesale prices increase, the price to the consumer will also go up which is the concern with inflation. The market appeared undeterred following three day of negative trading. S&P closed up 1.58%.

Wednesday

The market looked like it was preparing for another down day in anticipation of FRB minutes from January. The S&P 500 was down 0.8% most of the day. In the end it climbed out, managing to rise 0.09%. At the same time the 10-year treasury slipped back below 2%. So, while the markets regained composure, safe haven assets were being purchased.

Thursday

The S&P 500 tumbled on Thursday, falling 1.70%. The NASDAQ led the way lower, falling 3%. Fears came from two fronts on Thursday. Markets were feeling tensions rise in the situation between Ukraine and Russia. Additionally, Federal Reserve Board (FRB) member, Bullard, spoke. He indicated the FRB would have to take more aggressive action than the markets were pricing in to fight inflation.

Friday

Markets continued the slide into Friday. The S&P 500 lost 0.72% on the day. It is not surprising to see markets sell into the long holiday weekend. It is an extended period of time for bad things to happen, given the geo-political risks at play.

Conclusion

The S&P 500 ended up losing ground by 1.57% last week. It is coming close to closing down 105, which marks a technical correction. Volatility is up and safe haven assets are catching a bid. This marks the first correction since September-October 2020. They are typically 2 to 3 months in duration. That means we still have time for some more volatility before the cloud’s part…