Market Pulse

In focus

For many months, good news economically has meant bad news for markets and vice versa. This is mainly because a robust U.S. economy poses a challenge to the Federal Reserve (Fed) as it tries to cool inflation. Markets feared that if the jobs market or consumer spending stayed too strong, the Fed would keep rates higher for longer. Last week markets didn’t react this way though.

Retail sales numbers were released for the month of December and showed another month of falling spending. The Producer Price Index also showed signs of cooling in prices. Both releases would indicate that the Fed may not have to raise rates as aggressively anymore and if those trends continue, may not have to go as high. Both typically would have been rejoiced by markets last year, but instead last week, bad news was bad news. The S&P 500 dropped on the news and was down on the week overall. Economic growth concerns outweighed the potential of the Fed being more dovish.

At the same time, bond yields fell (bond prices rose) on the news. The Treasury market thought that the Fed may not have to be as aggressive and that demand for safe haven assets may yet return if growth concerns become the more important factor compared to inflation. This week’s data releases of fourth quarter GDP and the Personal Consumption Expenditures (PCE) inflation data will be another test to see if markets interpret these as good or bad news.

A look back

• International markets remained hotter than the U.S. as the MSCI EAFE index rose by 0.6% while the S&P 500 dropped by -0.7%.
• The 10-year U.S. Treasury yield dropped to its lowest point since September and further inverted the 3-month/10-year yield curve.
• U.S. Retail Sales showed a further deceleration in spending for December while the Producer Price Index showed tepid levels of price increases for December as well.

A look ahead

• The first look at fourth quarter GDP will be released this week as well as the Fed’s preferred metric for inflation, PCE.
• The Fed’s blackout period begins, so no more speeches until their next meeting on February 1. Markets will have to parse data releases to gauge how they may act.
• Economic releases: GDP, Durable Goods Orders, Leading Index, Personal Income & Spending, U. of Michigan Sentiment.

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