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The major indices ended down this week for the second week in a row, first time in 2023. Instability in the market was driven by reactions to economic releases and Fed comments throughout the week.
MoM inflation data in the January Consumer Price Index (CPI) was not pleasing, but the report showed continued deceleration on a YoY basis. Services inflation, the section that the Fed seems to care about the most, was the exception with a jump to 7.2% YoY from 7.0% in December.
Then a stronger than expected January retail sales report, higher-than-expected producer price data for January, and another remarkably low level of weekly initial jobless claims were released in the following days.
The positive economic news paired with accelerating services inflation, fueled concerns about the possibility of the Fed raising rates more and keeping them higher for longer than previously expected.
Fed comments this week seemed to corroborate those concerns. Cleveland Fed President Mester said she advocated for a 50-basis point rate hike at the last meeting, St. Louis Fed President Bullard shared the same sentiment, and Fed Governor Bowman said that hikes are needed until “a lot more progress” has been made on inflation.
5 of the 11 S&P 500 sectors made gains week led by consumer discretionary (+1.6%) and utilities (+1.1%). The energy sector (-6.3%) was the worst performer by a long shot with falling oil prices.
Below are breakdowns of daily action for the week.
- A quick dip right out of the gate had the S&P 500 slip below the 4,100 level before buyers stepped in and a rally effort took root.
- Mega caps were driver of index gains. Meta Platforms ($META) and Microsoft ($MSFT) each rose more than 3.0% on Monday with no specific catalysts.
- The NY Fed’s Survey of Consumer Expectations showed that inflation expectations are stable, but household income growth expectations have dropped.
- “Median inflation expectations remained unchanged at the one-year-ahead horizon, decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively.”Disagreement on these figures decreased slightly YoY
- The median expected growth in household income dropped to 3.3%. This is the largest one-month drop in the 10-year history of the series and is the first drop since last September.
- Tuesday’s trade was mixed as investors digested the January Consumer Price Index (CPI) released in early hours.
- Total CPI increased 0.5% MoM (in line with consensus) and is shown in the graph below. Core-CPI increased 0.4% MoM (in line with consensus).
- On a YoY basis, total CPI was up 6.4% (the smallest 12-month increase since October 2021) and core-CPI was up 5.6% (the smallest 12-month increase since December 2021). The YoY levels were not as low as expected AND services inflation hit 7.2% YoY from 7.0% last month.
- The key CPI takeaway is that there has been a clear deceleration from peak inflation; however, the inflation rates are nowhere near low enough for the Fed to even think about cutting rates this year.
- The market moved higher shortly after the open. The early gains faded, and the S&P 500 briefly slipped below the 4,100 level. There was a bounce late day and closed the session above intraday lows.
- Treasury yields seemed to have a more concrete reaction to the CPI data as yields jumped and closed higher.
- Ahead of Wednesday’s open was the retail report, which reflected continued strength in the economy, but left the market concerned that it boosts the likelihood of higher rates. Total sales in January were up 3.0% MoM (consensus 1.7%) and sales, excluding autos, up 2.3% ( consensus 0.8%).
- The key takeaway from the report is that consumers were spending freely on goods in January despite inflation pressure; in fact, every single sales category showed a MoM increase, led by a 7.2% surge in sales at food services and drinking places.
- The January Industrial Production came in flat (consensus 0.5%) and Capacity Utilization came in 78.3% (consensus 79.1%).
- The soft reading for January can be attributed entirely to a drop in utility output. Otherwise, there was some strength in mining and manufacturing output, the latter of which saw advances in durable, nondurable, and other manufacturing activity.
- Equities started down, but true to 2023 form, investors stepped in to buy the early weakness. The main indices all closed the session at or near their best levels of the day.
- High-beta stocks, uplifted by the positive earnings news and guidance from the likes of Airbnb ($ABNB), Roblox ($RBLX), and Analog Devices ($ADI), helped Wednesday’s gains.
- Thursday was down in the start and the finish. The negative bias was brought on by the higher-than-expected Producer Price Index (PPI) number for January and another low level of weekly initial jobless claims, which fueled concerns that the Fed will not pause its rate hikes in the near future.
- January PPI came in at 0.7% shown below (consensus 0.4%) and Core PPI at 0.5% (consensus 0.3%).
- The key takeaway from the report for the market is that headline inflation was hotter than expected on a monthly basis and causes concerns about inflation pressures persisting at higher levels for longer than expected.
- Weekly Initial Claims shown below came in at 194K (consensus 203K) and Continuing Claims at 1.696 million
- The persistence of initial claims below 200,000 reflects a very tight labor market, and a reluctance to cut workforces, which will continue to drive worries at the Fed about tight labor market conditions feeding into stickier wage-based inflation pressures as reflected in high service readings.
- The market recovery mid-day coincided with buyers stepping in when the S&P 500 breached the 4,100 level, along with Treasury yields backing down from their post-data release highs.
- There was a steep reversal in the last hour that had the major indices close the session near their worst levels of the day, which took the S&P 500 below 4,100 again.
- The late afternoon plunge was precipitated by Fed speak we previously mentioned (except for Mester, who spoke prior to the plunge).
- The stock market opened weak continuing Thursday’s downside momentum.
- Treasury yields began to settle and stock sentiment shifted slightly higher.
- Ultimately, the indices closed the session near their best levels of the day even though some mega cap names were not following.
Dividend Dollars’ Outlook & Opinion
That’s it for the recap. Now for my opinion!
This week was another week of consolidation and modest losses and matched perfectly with the “technicals suggest a flat or slightly bearish week ahead” call from last week’s report. This is the second week in a row of this since I called for a slowdown in the market outlook from 2/3/23.
We had two key inflation reports with the CPI and PPI, both came in well above their estimates causing a fair amount of volatility. One flaw from this report last week was that I did not touch on the coming PPI report. Historically, the PPI tends to not move the market as much as the CPI, however the bigger miss on PPI proved otherwise this week.
As you can see in the chart below, while still quite historically high, the YoY PPI (white) and CPI (blue) peaked in June of last year. They continue to trend lower.
Earnings reports this week had 59 reports of the S&P 500 companies, putting us 81% of the way through earnings season. 41 of the 59 this week beat EPS expectations, below so far are the aggregate beat rates this quarter compared to prior quarters. These figures are tracked using MarketBeat.
Now moving on to technicals. Only three weeks after the SPX broke above the long-term downtrend (red channel), broke above resistance at 4,100 (top green line), and hit a golden cross (white arrow) and the SPX has struggled to hold the support line at 4,100. The first half of the week looked decent, but the last two days did not. Ending the week under that level and establishing a new low on 2/17 compared to the last low on 2/10 looks like a technical breakdown. SPX may be trending in the down direction in the near term.
Other metrics have shifted into bearish territory since last week. SPX OI changes grew more this last week on the put side which is moderately bearish. ETF OI changes were slightly more on the put side, but not enough to make it bearish, I consider this to be neutral. The VIX open interest put/call ratio is down almost 10% this week, this movement follows the VIX index and implies that VIX is likely to go higher moderately in the near term. This is slightly bearish. SPXOICPR saw a similar move.
Overall, metrics like the above, failure of near-term technical support, hawkish Fed comments, a concluding earnings season, a five week wait till the next FOMC meeting, and mixed economic data all make the market look fairly mixed or slightly bearish in the near-term. Next week is light on the economic data front except for Core PCE (the Fed’s preferred inflation gauge) out on Friday. With a holiday on Monday and an apparent waiting period till the big Core PCE report on Friday, I’m anticipating a choppy week till end of week with Core PCE determining the final move.
That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.