It was a hectic week on the economic data front, with multiple high-impact reports delivered on Tuesday, Wednesday, and Thursday. Markets fared okay considering the barrage of new information, with the S&P 500 and Dow down narrowly while the Nasdaq and Russell 2000 were slightly positive.
Tuesday brought the most substantial report of the week, with the U.S. Bureau of Labor Statistics reporting an increase in CPI of +6.4% YoY and +0.5% MoM. In addition, the much-watched Core inflation numbers were up +5.6% YoY and +0.4% MoM. While the numbers were slightly higher than expectations, there are a few bright spots. First, shelter continues to be the primary driver of the total increase, contributing 40% of the total year-over-year increase. Clearly, this doesn’t sound like a bright spot; however, the CPI shelter component is a lagging indicator, and the high-frequency shelter data shows that prices have stabilized (declining in the last five months). In addition to shelter, a closer look at the current 3-month annualized inflation rate (a preferred method for the Fed) shows that inflation is around +3.5%. While this is still above the Fed’s long-term target, it is undoubtedly moving in the right direction relative to the first half of 2022.
Wednesday and Thursday both had significant releases as well, with retail sales and producer prices rising well above expectations. Retail sales increased across almost every category, with spending at bars & restaurants up +25% YoY. Producer prices were up +0.7% MoM, well above expectations and the most in seven months, driving some concern about the pace of future inflation. While this is somewhat concerning, over the six months preceding the January report, PPI increased by roughly +1% annualized. Both of these reports led to skepticism about the ability of the Fed to pause or lower interest rate increases. This doubt is evidenced in the continued expansion of the terminal Fed funds rate and two difficult days in the equity markets after the reports.
Economy
- U.S. equity markets were mixed for the week ending February 17, with the S&P 500 down -0.3%, the Nasdaq up marginally, and the small-cap Russell 2000 outperforming up +1.4%. It was a meaningful news week with multiple significant economic releases, including CPI, PPI, retail sales, and housing statistics.
- U.S. CPI slowed slightly to +6.4% in January, the lowest reading since October 2021. Food price increases slowed (+10.1% vs. +10.4%), while used automobiles declined (-11.6% vs. -8.8%). In contrast, shelter costs increased faster (+7.9% vs. +7.5%) along with energy (+8.7% vs. +7.3%), as gasoline prices rose +1.5%, reversing from a -1.5% decline in December.
- Retail sales unexpectedly jumped 3% MoM in January 2023, the most considerable increase since March 2021 and way above market forecasts of a +1.8% rise. It follows a +1.1% drop in December. The most significant increases were seen in food services and drinking places (+7.2%), motor vehicles and parts (+5.9%), and furniture stores (+4.4%).
- Producer prices for final demand in the U.S. increased +0.7% month-over-month in January, the most in seven months and considerably higher than market forecasts of +0.4%. The indices for residential natural gas, diesel fuel, jet fuel, soft drinks, and motor vehicles moved higher. On the flip side, prices for fresh and dry vegetables decreased.
- Preliminary estimates showed that building permits in the U.S. rose +0.1% from the prior month to a seasonally adjusted annualized rate of 1.3 million in January, which is close to the lowest since May 2020. Figures were below market expectations of 1.35 million. Single-family authorizations fell -1.8% to a rate of 718k, while the volatile multi-segment rose +2.5% to 621k.
Stocks
- U.S. equities were mixed for the week. Energy and Real Estate declined, while Consumer Discretionary and Utilities outperformed. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 8 basis points to 3.82% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by government bonds and corporate bonds.
