Markets ended last week broadly higher, but not without some turbulence. The S&P 500 kicked off the first trading session of the new year down nearly half a percent. After heavy vacillation, the index closed out the week with its best session in over a month. Treasuries mostly improved last week as the 10-year yield fell by 31-basis points (0.31%) to break through its 50-day moving average.
While some of the volatility in the equity markets last week seemed to support the idea that January trading can be somewhat mean reverting, the choppiness was once again a byproduct of economic data influencing expectations on inflation and the Federal Reserve’s (Fed) response. Declining average hourly earnings, as well as contractions in both the ISM manufacturing and services indices, supported the narrative that the Fed may consider a step-down in the size of rate hikes. On the other hand, payroll increases, a drop in the unemployment rate, and hawkish Federal Open Market Committee (FOMC) meeting minutes created skeptics of that idea.
The coming week will be important with Consumer Price Index (CPI) inflation data from December being published on Thursday and corporate earnings getting underway with banks on Friday. In the near-term, we still expect choppy waters to remain given economic and earnings risk
A look back
- Global equity markets moved higher last week with broad strength across all regions. The MSCI ACWI broke a four-week stretch of negative performance.
- Yields fell for both the 2- & 10-year U.S. Treasuries; however, the 3-month yield rose, further inverting the 3-month/10-year curve.
- U.S. payrolls from December showed an increase of 223,000, and the unemployment rate dropped to 3.5%.
A look ahead
- Companies will begin to report earnings this week. Most notably, the big banks will start reporting on Friday.
- Several Fed officials, including Fed Chair Powell, will take the stage this week ahead of Thursday’s highly anticipated CPI report.
- Economic releases: NFIB Small Business Optimism, Wholesale Inventories, CPI, Average Hourly Earnings, University of Michigan Sentiment.
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