Investors were fixated on inflation last week, with all eyes on the December Consumer Price Index (CPI) report released on Thursday. Markets responded favorably to the data as yields dropped, and the S&P 500 finished the week up 2.7%. This was the second- straight winning week to open the year.
The CPI report showed headline inflation rose 6.5% year over year, marking the sixth-straight month of deceleration. Core CPI also slowed on a year-over- year basis. A University of Michigan survey showed that consumer inflation expectations have dropped, with consumers now expecting prices to rise by 4.0% over the next twelve months, the lowest number since June 2021. The Federal Reserve (Fed) will likely be pleased with this trend with roughly two weeks until its next meeting, and markets are now more confident the central bank will again slow rate hikes. Futures prices now imply over a 90% probability of a 0.25% increase, which would be the smallest hike since March 2022. Investors will get a glimpse into how recent monetary tightening has affected companies with earnings season starting last Friday and ratcheting up this week.
Big banks were in the spotlight on the first day of earnings season, delivering mixed results. Themes included cautious guidance and significant provisions for loan losses to prepare for a potential recession. On top of corporate earnings, retail sales data will be in focus this week, providing another signal on the health of the U.S. economy.
A look back
- Equity markets finished mostly in the green last week. The S&P 500 was up roughly 2.7% while international developed and emerging markets were up over 4%.
- Yields across the curve dropped mildly, and the 2-/10-year inversion widened to -0.73%.
- Headline CPI rose 6.5% on a year-over-year basis, and core inflation increased by 0.3% in December. Both numbers were as expected and marked a deceleration from November.
A look ahead
- Earnings season kicks off in earnest this week. Numerous financial companies will report Q4 results.
- Investors will monitor the Producer Price Index (PPI) and retail sales data for more insight on the path of inflation and the economy.
- Economic releases: PPI, Retail Sales, Housing Starts, Existing Home Sales, Empire Manufacturing, Industrial Production.
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