The widely-watched CPI report appeared to confirm inflation worries if the initial stock market reaction was any indication. But as we've seen before, that could change
(Wednesday Market Open) Hold on! The three major benchmarks were poised to start the session on strong footing in the early going as investors awaited for inflation news. And then—bang!—they flipped solidly lower ahead of the open.
The widely watched Consumer Price Index (CPI) report released earlier offered another signal that inflation was on the rise. Within moments of the release, the trio moved sharply lower. The Labor Department’s report found that prices in January rose at a 0.5% clip, notably ahead of Wall Street’s expectations of a 0.4% gain. Core CPI, which strips out volatile food and energy prices, advanced by 0.3%, also higher than the 0.2% forecast.
The Dow Jones Industrials ($DJI), which, in pre-market trading, was trending higher in triple digits ahead of the report, immediately shifted course, falling as much as 300 points within three minutes. That appeared to cool off by the open, with the Dow down 77 points at the open. The S&P 500 (SPX) bounced around the flat line before the report was released. It was off by 7 points at the open while the Nasdaq Composite (COMP) had stronger upward momentum that turned 24 points to the downside.
If the markets stay on that pace, they could upset the four-peat on session gains they appeared to be headed toward early on. Or they could have a repeat of yesterday’s session, when the markets reversed course to end higher in afternoon trading.
Yesterday’s turnabout might not exactly have been about fair play, but it looked to help the markets score a third straight day of gains. However, it didn’t help year-to-date change of the direction of the trio, which were still in negative territory.
The Dow started yesterday's session off 180 points lower, but managed to edge up 0.2% at the close while the SPX added 0.3% and the Nasdaq climbed 0.5%. As of early this morning, the Dow and SPX were on track to record their worst monthly losses since August 2015, while Nasdaq’s pullback could be its poorest in two years.
Though it was a notable intraday swing for the Dow, some analysts said it might have been tied to a reluctance to make any drastic trades ahead of the today’s CPI report. Many said then that they feared that if the report showed further signs of inflation, it might tip the markets back into triple-digit losses—like it did early on.
“Never before has a monthly [consumer-price index] number received so much attention,” Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, told the Wall Street Journal. “Traders and those much shorter-term oriented are reluctant to take big positions in advance of the data.”
With the data out now, and the markets so quickly moving lower, those fears might have been justified. Or not. Volatility appears to still be the driving force here. Volatility rates remain elevated, rising above 25 in early market activity, yet still below last week’s intraday high over 50.It might serve investors well to keep these things in mind as you go forward.
Remember this about the CPI: It’s just one data point, and one print does not make a trend. Retail prices on the CPU were higher in January, which rarely has happened in post-holiday trading. But they tracked lower on the government's retail report. (See below.)
Investors also might want to keep an eye on the benchmark 10-year Treasury yield, according to Societe Generale. (See below.) The 10-year yield closed at a fresh four-year high Monday at 2.86%. It jumped to 2.86% ahead of the open. Wall Street analysts have been abuzz about the 10-year’s pace to a 3% resistance yield level. But since jumping Feb. 2, it has mostly stayed in that 2.82%-2.86% range. Today’s CPI report appeared to juice the yields marginally in early trading.
Chipotle Mexican Grill (CMG) shares jumped some 12% in the early going. Yesterday, the chain named Brian Niccol as its new chief executive in a bid to turn the chain around. Niccol comes from Taco Bell, a division of YUM Brands (YUM).
FIGURE 1: BENCHMARK BREAKDOWN REDUX.
Let’s take a look at the movements of the benchmarks in tandem again. Like the Olympic figure-skating couples moving in unison, these three indices—the Dow with bars, the SPX in purple, the Nasdaq in blue—look like they might be on ice too. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Retail Sales Rose in January? The CPI report noted that apparel prices climbed 1.7% in January, the biggest jump in almost three decades. Apparel prices account for about 3% of the CPI and women’s apparel costs jumped a record 3.4%, according to the report. Yet a separate report showed that U.S. retail sales unexpectedly fell in January, down 0.2% compared with a 0.3% expected increase, and December figures were revised downward. What’s up with all that?
The early take from a handful of analysts was that the retail sales decline suggested that consumer spending might be heading down a slower path in the first quarter. The jump in women’s apparel costs, however, might be tied to the strong holiday sales data, which cleared out much of retailers’ inventory in December. Typically, January is marked by deep discounts as retailers work to clear the shelves of left-over holiday goods. That, according to analysts, didn’t happen this year. Stay tuned.
When Do Higher Interest Rates Hurt Equities? When the 10-year Treasury note hits 3%, according to Societe Generale, the Paris-based banking and financial services giant. Granted, that’s a “magic number,” according to a report in MarketWatch, but the math is based on the equity risk premium—some Wall Street analysts were talking about yesterday. In simple terms, the risk premium is the spread between the stock market’s future expected returns minus the risk-free rate, which many analysts tend to benchmark as the 10-year Treasury bond rate. The equity risk premium sits at 2.8%, below the 3.9% long-term average, the article said.
At a 3% yield, Societe Generale calculated that the SPX might fall to 2,500. “If the equity risk premium is high (above average), a higher bond yield can be absorbed by the equity market,” MarketWatch quoted the strategists at Societe Generale. “However, when the equity risk premium is already very low, the equity market’s ability to absorb a higher yield is limited.” Just some food for thought; remember nothing in the markets is ever cast in stone and past performance offers absolutely nothing about what the future might hold.
Mester as Fed Vice Chair? That’s what the Wall Street Journal is reporting. People “familiar with the matter” have told the Journal that the White House is considering Loretta Mester, president of the Federal Reserve Bank of Cleveland for the No. 2 post. The White House “is interested in filling the vice chairman post with a well-respected expert in monetary economics,” according to the report.
Mester, who has led the Cleveland Fed since 2014 and spent nearly 30 years before that as a Philadelphia Fed economist, is considered “moderately hawkish,” the article said. A nomination isn’t imminent and other economist contenders include San Francisco Fed President John Williams; Richard Clarida, a managing director at money manager Pimco, and Mohamed El-Erian, Pimco’s former chief executive, according to the Journal. Stay tuned.
Happy Valentine's Day, JJ @TDAJJKinahan
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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR
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