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Stocks were mixed this week after data showed inflation picked up last month in the U.S.
The Bureau of Labor Statistics reported that the CPI rose 0.5% in January on a seasonally adjusted basis, after a 0.1% revised increase for December. Yet the trailing 12-month measure eased for the seventh month in a row. The CPI was up 6.4% from a year ago, slightly above expectations (6.2%). The widely watched core figure - which excludes fuel and food prices - rose 0.4% for the same month and 5.6% for the year.
The strong labor market also raises the fear that the Federal Reserve keeps its aggressive stance in place for longer than investors could expect. Jobless claims unexpectedly fell to 194,000 last week while analysts were expecting 200,000.
The S&P 500 index slid 0.28% week-over-week (up 6.24% year-to-date). The stock market rally is losing steam, with the benchmark index posting a second consecutive weekly loss. More than half of the firms listed on the S&P 500 have already reported earnings with almost 70% beating profit estimates for the quarter. The blue-chip Dow Jones Industrial Average edged down 0.13% (up 2.05% YTD) to end at 33,826.69, while the tech-heavy Nasdaq Composite gained 0.59% (12.62% YTD) to close at 11,787.27. Small caps outperformed large caps with the Russell 2000 up 1.44% (+10.51% YTD).
European markets did better than their U.S. peers although inflation remains a thorny issue on the old continent. German producer prices (PPI) fell by 1.0% last month but they still represented an annual rise of 17.8%, compared to January 2022, above the 16.4% expected. That said, investors shrugged off the news as earnings seem to be their primary focus today. So far, Q4 2022 corporate earnings have been significantly better than anticipated. Key players in semiconductor technologies (STMicroelectronics), banks (BNP Paribas), health care (Sanofi), energy (TotalEnergies), and luxury (Hermes, LVMH) reported strong revenue growth, earnings above expectations and good forecasts.
The MSCI EMU jumped 1.94% (up 12.52% YTD) while the boom in luxury stocks propelled France’s CAC 40 index near a record close (7,347.72 points on Friday or +3.06% for the week, +13.50% YTD). The FTSE 100 rose 1.55% (up 7.42% YTD) to 8,004.36 points after reaching a new record intraday high on Thursday, just above 8,040 points.
By contrast, Asian markets finished the week in the red. The Shanghai composite lost 1.12% (+4.36% YTD) though investors continue to bet on a reopening-led recovery this year. Chinese bank loans surged to record highs in January as the country was relaxing its anti-COVID restrictions during the month. Japan’s Nikkei snapped a five-week winning streak, down 0.57% (up 5.44% YTD). Traders are digesting the nomination of Kazuo Ueda, an academic economist, to be the next governor of the Bank of Japan. This surprise move could pave the way for the central bank to wind down its ultra-easy monetary policy promoted by the incumbent, Haruhiko Kuroda.
Energy stocks weighed down by oil and natural gas prices
Crude oil and natural gas prices tumbled this week. WTI Futures were down 4.24% to $76.33 a barrel on concerns of an economic slowdown in the U.S. Natgas prices plunged 10% to around $2.50 per million British thermal units. The warmer-than-normal weather has depressed space heating demand and led to strong storage inventories. Hopefully, this could ease the inflationary pressure in the U.S. as natural gas accounts for a significant portion of household energy needs. Same trend in Europe where prices slumped to their lowest level since September 2021, hitting €49 per megawatt hour.
As a result, energy was the worst performer among the S&P sectors this week (down 6.92%), far behind real estate (-1.35%, second last place in the ranking).
By contrast, consumer discretionary stocks outperformed the broad index (+1.64%) in the wake of Tesla (TSLA), up 5.80% over the week (up 69.11% for the year after a rough 2022). Overall, defensive sectors fared well with utilities and consumer staples ending the week in positive territory, each up 0.90%.
Bitcoin on the rise again
Even if regulation and contagion risks have recently pressured Bitcoin, the cryptocurrency has regained a foothold at around 24,750 after the CPI data. BTC price has jumped 49% from the start of the year.
Treasury yields rise again after the CPI report
The U.S. consumer price index (CPI) rose 0.5% in January, which translated to an annual gain of 6.4% versus 6.5% in December, against predictions of 6.2%. Furthermore, the number of Americans filing new claims for unemployment benefits unexpectedly fell last week. Despite the Fed’s rate push to cool the economy, the labor market is still tight. That’s why a vast majority of investors remain concerned about the pace of rate hikes in the wake of Fed members’ hawkish comments.
St. Louis President James Bullard said “continued policy rate increases can help lock in a disinflationary trend during 2023.” Consequently, he would not rule out supporting a 50-basis point rate hike in March. Moreover, Loretta Mester, President and CEO of the Federal Reserve Bank of Cleveland, said data has not changed her view that officials would need to bring the U.S. Fed funds rate above 5%. She “saw a compelling economic case for a 50 basis-point increase earlier this month.” She added that the U.S. central bank has to be prepared to move higher if inflation remains stubbornly high.
Against this backdrop, Treasury yields rose again as investors bet on a more aggressive Federal Reserve. The yield on the U.S. 10-year Treasury climbed to 3.82%, up 8 basis points week-over-week. The 2-year Treasury yield jumped to a more than 3-month high, topping 4.62%. The yield curve is inverting to extreme levels (around -80 basis points) last seen in September 1981. Money markets are currently pricing in a terminal rate of 5.28% by August.
Unsurprisingly, yields rose across all major advanced economies. In Europe, the yield on the German 10-year Bund gained 7 basis points to 2.44% from 2.37%. The French OAT yield followed suit, up 8 basis points at 2.91%.
The move higher in rates pegged all bond segments. Investment grade corporate bond prices were down 0.68% in Europe (IBOXX € Liquid Corporates index up 1.38% year-to-date) and down 0.72% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index up 1.63% YTD).
High-yield bonds did not fare better. They edged down 0.35% in Europe (IBOXX € Liquid High Yield Index up +3.39% YTD) and lost 0.70% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index up 1.59% YTD). Emerging debt dropped 1.21% (+1.58% YTD), weighed by a strong greenback (dollar index above 103.88).
