Price Check: Market Starts Week at Record Highs, but Tuesday's January CPI Data Could Set Tone

Trading today might lack direction ahead of key Consumer Price Index (CPI) data tomorrow and retail sales and producer prices later this week. Treasury yields fell early Monday, which could support stocks, while earnings get busier tomorrow with Coca-Cola and Hasbro.

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Key Takeaways

  • Tuesday’s U.S. January CPI data could help set the tone, with PPI in the wings

  • Earnings schedule is light today but Coca-Cola, Hasbro, and Biogen loom early Tuesday

  • SPX finished above 5,000 Friday for the first time, but market breadth remains challenged

(Monday market open) The big game in Vegas is over but investors are gathering on the sidelines ahead of Tuesday’s January inflation data. Premarket trading lacked direction while Treasury yields and crude oil gave up some yardage, perhaps a supportive element.

January’s Consumer Price Index (CPI) early tomorrow followed by January Producer Prices (PPI) later this week could provide the Fed and investors more insight on whether inflation continues to track lower, as the central bank expects. Still, it’s just one month of data, and any initial dramatic market reaction up or down should be seen in that light.

Before the Fed meets next month, policy makers will also mull January Personal Consumption Expenditure (PCE) prices (the Fed’s favored inflation meter), February’s jobs report, and February CPI and PPI. That’s plenty of data to shape thinking by mid-March.

“Our expectation continues to be that the Fed will initiate rate cuts mid-year (probably at the May or June meeting) and then cut by 25 basis points three to four times in the second half of the year,” said Kathy Jones, Schwab’s chief fixed income strategist. “The market is aligning around that view.”

Any surprises in the inflation numbers could compel investors to alter expectations for the timing and magnitude of any Fed rate cuts this year.

“With CPI and PPI, any kind of outsized move one direction or another could move the needle for Fed policy,” Schwab Center for Financial Research analysts said in a report. “Probably not for the March meeting but maybe for the calculus around May or June.”

Data picks up as the week continues. U.S. data lately has generally been better than expected, but analysts expect this week’s reports to show some softening. Eight Fed speakers are on tap this week, beginning with remarks this morning from Fed Governor Michelle Bowman.

The S&P 500® index (SPX) posted its third consecutive daily record close and settled above 5,000 for the first time ever Friday as technology shares extended a march higher. The SPX has gained in 14 of the last 15 weeks—the first time that’s happened since 1972, according to Barron’s—amid AI, economic data, and earnings momentum. However, trading today could be choppy ahead of tomorrow’s key data.

Futures based on the SPX dropped 0.01% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.12%, and futures based on the Nasdaq-100® (NDX) inched up 0.03%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) dropped nearly four basis points to 4.15%.
  • The U.S. Dollar Index ($DXY) rose slightly to 104.18.
  • The Cboe Volatility Index® (VIX) jumped to 13.36.
  • WTI Crude Oil (/CL) fell nearly 1% to $76.11 but remains near February highs.

The increase in VIX early Monday is worth tracking. Volatility generally bubbled under the radar last week after a rally in late January but tends to tick up in late February and March. If VIX is on the rise and major equity indexes also gain ground, that often sets up a scenario where one or the other ultimately yields. Interest rate-sensitive sectors have seen more volatility lately than other parts of the market.

What to watch

CPI check: Expectations for January CPI hint at marginal progress. Analysts expect monthly core CPI of 0.3%, up slightly from the revised 0.2% the Bureau of Labor Statistics (BLS) reported in December. They also expect a slight improvement to 0.2% for headline CPI from 0.3% in December, Trading Economics said. Core CPI strips out volatile food and energy prices.

Consensus for year-over-year core January CPI is 3.7%, down from 3.9% in December. Headline annual CPI is seen rising 3%, versus the prior 3.4%. This handy Schwab video explains how to track inflation using CPI and other indexes.

The slight downward revision by BLS to the December CPI reading Friday sparked a quick Treasury rally that also quickly faded.

“The good news is that inflation is falling,” said Schwab’s Jones. “The CPI seasonal adjustment revisions didn’t make much difference to the trends over three, six, and 12 months. Similarly, the PCE and core PCE figures are trending lower, which opens the door to the Fed easing policy later this year. We expect the March meeting will focus on tapering quantitative tightening (QT).”

QT is a tool the Fed has employed to reduce its balance sheet over the last two years as part of its program to slow the economy and reduce inflation,

Data docket: Other U.S. reports under scrutiny this week include retail sales, building permits, housing starts, consumer sentiment, and industrial production, with PPI also in the mix.

At the same time, it’s quiet in China, where markets are closed all week for the Lunar New Year holiday. Most Asian markets were closed Monday, and European indexes hover near the flatline.

Still to come: Earnings season may be past peak, but there’s plenty ahead. Weekly highlights include Coca-Cola (KO), Biogen (BIIB), Airbnb (ABNB), and Lyft (LYFT) tomorrow, followed in coming days by Cisco (CSCO), Roku (ROKU), Applied Materials (AMAT), and Deere (DE), among many others. More than 60 S&P 500 companies, including two $DJI members, step up to the line this week. Big box retail takes the stage starting a week from tomorrow.

Today’s earnings and data calendar is thin, but Waste Management (WM) is scheduled to report after the close.

Stocks in spotlight

Earnings season is two-thirds done and 75% of S&P 500 companies have reported positive earnings per share (EPS) surprises, according to research firm FactSet. Only 65% beat average Wall Street revenue estimates, however. Blended year-over-year EPS growth (including companies already reporting and estimates for those that remain) is 2.9%, up from an expected 1.5% at the start of the quarter.

Revenue growth so far of 3.9% is also better than initially expected, but neither EPS nor revenue are exactly home runs, historically. Also, S&P 500 Q4 net profit margins of 11.1% are down slightly from a year earlier and unimpressive. There’s debate on Wall Street whether margins are bottoming. The average analyst estimate for 2024 EPS growth of nearly 11% would tend to support that idea, but proof is in the data.

Info tech and communication services keep twirling the market’s baton, up nearly 10% and nearly 12%, respectively, so far in 2024. Bottom dwellers include interest rate-sensitive sectors like real estate and utilities that potentially face an upward battle if the Fed keeps rates elevated longer.

Market breadth remains an issue, as the equal-weighted S&P 500 Equal Weight index (SPXEW) rose just 0.47% last week compared with a 1.4% increase for the SPX. The so-called “Magnificent Seven” stocks together rose nearly 3%.

Stocks on the move early Monday include:

  • Diamondback Energy (FANG) climbed nearly 1% in premarket trading news it would merge with Endeavor Energy Resources in a $26 billion deal. The combination will create a large independent operator in the oil rich Permian region of the southwestern United States. Consolidation in the energy space has picked up lately.
  • Rivian Automotive (RIVN) lost nearly 4% early Monday after getting a downgrade from Barclays, which cited increased signs of demand pressure amid the broader electric vehicle slowdown.
  • Shares of the Magnificent Seven lacked direction early Monday after leading markets higher much of last week. It’s early, but at least for now it’s unclear if that momentum carried over into Monday.

Eye on the Fed

Early today, futures trading pegged chances at 15.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 61% chance the funds rate will be lower than now after the Fed’s May meeting.

Fed, earnings, and homes: Want analysis on the latest Fed signaling, how companies have fared during earnings season, and the commercial and residential real estate landscape? Check the new Schwab On Investing episode featuring Chief Investment Strategist Liz Ann Sonders and Chief Fixed Income Strategist Kathy Jones. The episode features two real estate professionals discussing that sector.

CHART OF THE DAY: CALMER WATER. After a roller coaster ride in 2023, the benchmark 10-year Treasury note yield (TNX-candlesticks) has settled into a trading pattern over the last two months between roughly 3.8% and 4.25%. Those lines (red lines) have generally held, and an extended move above 4.25% isn’t expected. However, the 20-day moving average (blue line) has been trending higher the last few weeks and yields are now above it. Data source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Home on range: The Fed hasn’t changed interest rates in more than six months since its last hike in late July, and that’s possibly one reason the 10-year Treasury note yield (TNX) has been mostly rangebound between 3.8% and 4.2% since early December. One factor behind the strength in equities could be the less volatile yield picture, which gives companies and investors a bit more comfort in the longer-term outlook. It’s difficult to make business or investment plans if you anticipate the kind of dramatic yield growth seen in 2022 and 2023. A calmer rate environment, even at levels much higher than everyone got used to in the roughly 15 years following the Global Economic Crisis of 2008, sets up the playing field without constantly moving the goalposts. There’s no guarantee rate swings are over, of course, and a move toward technical resistance at 4.25% might cause concern on Wall Street. “We don’t expect a sustained rise above 4.25%,” Schwab’s Jones said.

Separate ways: The energy market diverged last week. WTI crude (/CL), which had been falling, reversed course and jumped back above $76 per barrel as Middle East peace talks appeared to falter. At the same time, warm North American weather helped send natural gas futures (/NG) below $2 per million British thermal units for the first time in nearly a year. Front-month futures set three-year lows Friday, falling below last April’s $1.946 to trade under $1.80 at times. Natural gas hasn’t been this cheap since 2020. With crude, one technical level to watch is $77.42, the 200-day moving average for the front month contract. As an aside, /CL remains in backwardation, with the front month priced above later contracts. The futures market pegs prices to drop to near $73 over the course of 2024 and to $71 by mid-2025.

Greenback and megas: The U.S. Dollar Index remains just below recent two-month highs as near-term Fed rate cut hopes dim. Though the rising dollar partly reflects solid U.S. economic data, recent guidance from many reporting companies could mean there’s some caution developing. Specifically, chip sector guidance could reflect worries about a slowing economy as the Fed kicked the idea of rate cuts farther down the road. Outlooks from McDonald’s (MCD) and PepsiCo (PEP) last week reinforced worries about consumers. Any slowdown in the chip sector would conceivably reflect falling demand for major consumer items like phones and cars, which heavily depend on microchips. Despite the dollar’s strength and cautious outlooks, mega-caps continue to perform well, helped mainly by AI excitement. Investors may also be embracing what they perceive as areas of less risk if interest rates remain higher for longer. The dollar and mega-cap stocks often found buyers at such times over the last two years. “The dollar has rebounded in response to the outperformance of the U.S. economy and changing expectations about Fed policy versus other major central banks,” said Schwab’s Jones. “We look for the dollar to remain rangebound for now.”

Calendar

February 13: January CPI and Core CPI and expected earnings from Biogen (BIIB), Coca-Cola (KO), Hasbro (HAS), Airbnb (ABNB), and Lyft (LYFT).

February 14: Expected earnings from Occidental Petroleum (OXY), Kraft Heinz (KHC), and Cisco (CSCO).

February 15: January Retail Sales, January Capacity Utilization, January Industrial Production and expected earnings from Deere (DE), Applied Materials (AMAT), and Roku (ROKU).

February 16: January Housing Starts, January Building Permits, January PPI and Core PPI, University of Michigan February Preliminary Consumer Sentiment.

February 19: U.S. markets closed for President’s Day holiday.

February 20: Expected earnings from Medtronic (MDT), Walmart (WMT), Home Depot (HD), and Toll Brothers (TOL).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

Print

Key Takeaways

  • Tuesday’s U.S. January CPI data could help set the tone, with PPI in the wings

  • Earnings schedule is light today but Coca-Cola, Hasbro, and Biogen loom early Tuesday

  • SPX finished above 5,000 Friday for the first time, but market breadth remains challenged

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